FIN 4510 Chapter 27 - Leasing Multiple Choice

For lease payments to be tax deductible the IRS requires that:

• the lease must be primarily for business purposes.

• the initial present value of the lease payments must be less than 90 percent of the asset cost.

• the lease term must be less than the life of the asset.

• the lease payments must be less than comparable loan payments if the asset were purchased.

• the lessee should have the option to purchase the asset at a discounted price at the end of the lease term.

the lease must be primarily for business purposes

In a direct lease, the:

• lessor is the end user of the leased asset.

• lessee purchases the asset from the manufacturer.

• lessee owns the asset.

• lessor is generally an independent leasing company.

• lessee rents the asset from the manufacturer.

lessor is generally an independent leasing company

If a firm enters a sale and leaseback agreement, then:

• the lease automatically becomes a nonrecourse lease.

• the lessor realizes an immediate cash inflow.

• the lessor benefits while the lessee loses.

• the lessee must forfeit the right to repurchase the asset at a later date.

• both the lessor and the lessee benefit.

both the lessor and the lessee benefit

A firm borrows money to purchase equipment which it then leases to customers. The firm must pay its loan payments on this equipment even if its customers fail to pay their lease payments. Which one of the following terms best describes one of these leases?

• Sale and leaseback arrangement

• Operating lease

• Perpetual lease

• Single-investor lease

• Straight lease

Single-Investor lease

A customer has a fully amortized 12-year lease on a piece of equipment. The lease requires the customer to pay all taxes, maintenance costs, and insurance premiums related to the lease. The customer has a(n) _________ blanklease.

• open

• straight

• tax-oriented

• financial

• operating

financial

A firm should lease rather than buy when the:

• IRR from leasing exceeds the risk-free rate of return.

• annual loan payments for a purchase are less than the annual lease payments.

• IRR from leasing exceeds the aftertax cost of borrowing.

• asset's life is less than five years.

• NAL from leasing is positive.

NAL from leasing is positive

A leveraged lease is a:

• lease paid with money borrowed by the lessee.

• lease where the lessor borrows on a nonrecourse basis.

• type of operating lease.

• lease where the lessee is the owner of the asset for tax purposes.

• sale and leaseback arrangement.

lease where the lessor borrows on a nonrecourse basis

A customer pays $640 per month to lease a car from a car rental establishment. In this transaction, the car rental establishment is the:

• trustee.

• lessee.

• manager.

• lessor.

• guarantor.

lessor

The relevant discount rate for evaluating a lease is the firm's:

• pretax cost of borrowing.

• aftertax cost of borrowing.

• cost of equity financing.

• market rate of return on short-term assets.

• risk-free rate of return.

aftertax cost of borrowing

Which one of the following options is considered to be the best reason for obtaining a capital lease?

• To reduce the liabilities shown on the firm's balance sheet

• To obtain 100 percent financing

• To avoid the restrictive covenants often found in loan agreements

• To extend payments over a period of time

• To benefit from the implicit interest rate of a lease

to avoid the restrictive covenants often found in loan agreements

Which one of the following statements is correct concerning taxes and leasing?

• Tax reduction is a legitimate reason for leasing.

• A firm should only lease an asset if the lease will be fully amortized.

• If a firm has significant net operating losses, it should be the lessor in a lease.

• Lessors generally benefit from leases while lessees do not.

• The lessee should be the party with the higher tax bracket.

Tax reduction is a legitimate reason for leasing

A firm that is cyclical in nature and requires extra equipment only during its peak periods should consider leasing that extra equipment using a(n) _________ blanklease.

• leveraged

• sale and buyback

• operating

• tax-oriented

• financial

operating

The user of a leased asset is called the:

• Lessee

• Lessor

• Guarantor

• Trustee

• Manager

Lessee

An operating lease has which of the following characteristics?

• The economic life of the asset equals the lease term

• The lessee has responsibility for the maintenance and insurance

• The lease payments recover the full cost of the asset

• The lessee can cancel the lease prior to the expiration date

• The lease term is relatively long-term

The lessee can cancel the lease prior to the expiration date

If a lessor borrows money from a lender on a nonrecourse basis to purchase an asset that will be leased to another party then the:

• Lessor is responsible for the loan payments whether or not the lessee pays the lease payments

• Lessee must pay both the lease payment and the loan payment

• Loan is considered paid in full if the lessee discontinues making the lease payments or terminates the lease early

• Lessor is only obligated to pay the loan payments as long as the lessor is collecting the lease payments

• Lender must pursue the lessor if the lessee fails to make the agreed upon lease payments

Lessor is only obligated to pay the loan payments as long as the lessor is collecting the lease payments

Which one of the following statements is correct concerning taxes and leasing?

• Tax reduction is legitimate reason for leasing

• The lease should be the party with the higher tax bracket

• Lessors generally benefit from leases while lessees do not

• If a firm has significant net operating losses, it should be the lessor in a lease

• A firm should only lease an asset if the lease will be fully amortized

Tax reduction is a legitimate reason for leasing

Which one of the following options is most likely the main reasons why a lessee decides to lease an asset on a short-term basis rather than buy that asset?

• To keep the asset off the balance sheet

• To avoid taxes

• To lower transaction costs

• To increase collateral

• To provide nonrecourse protection

To lower transaction costs