Leasing

What is the fundamental nature of a lease agreement between a lessee and a lessor?

From a non-accountant's perspective, which of the following is a primary characteristic of an operating lease?

What is the primary difference between a leveraged lease and other types of leases?

Under the Financial Accounting Standards Board (FASB) Statement No. 13, when must a lease be classified as a capital lease?

What is the primary motivation for a firm to try to classify a lease as an operating lease rather than a capital lease for accounting purposes?

According to IRS guidelines, which of the following lease features would likely cause the IRS to treat the transaction as a conditional sale rather than a true lease?

In the Xomox Corporation example, the company can purchase a machine for $10,000, which will generate aftertax operating savings of $3,960 per year for five years. The corporate tax rate is 34 percent and straight-line depreciation is used over five years. What is the annual depreciation tax benefit?

The incremental cash flows from leasing instead of purchasing for Xomox are a $10,000 inflow at Year 0, followed by five annual outflows of $2,330. What do these outflows represent?

What is the general principle for discounting riskless cash flows in a world with corporate taxes?

If a firm is surprised to learn it will receive a guaranteed aftertax inflow in the future, how does this affect its optimal debt level today?

In a lease-versus-buy analysis, why is the weighted average cost of capital (WACC) an inappropriate discount rate for the incremental cash flows?

What does the concept of 'debt displacement' imply about leasing?

In a scenario where the lessor and lessee have the same tax rate and there are no transaction costs, what is the net present value of the leasing deal from the combined perspective of both parties?

Which of the following is considered a good reason for a firm to lease an asset rather than buy it?

Quartz Corporation, which has a zero tax rate, is considering leasing equipment. The appropriate pre-tax borrowing rate is 10 percent. What is the reservation lease payment (LMAX) for Quartz if the equipment costs $10,000 and the lease term is five years?

New Leasing Company, which is in a 34 percent tax bracket, considers leasing equipment that costs $10,000 and is depreciated straight-line over five years. The appropriate pre-tax borrowing rate is 10 percent. What is the reservation lease payment (LMIN) for New Leasing?

Which of the following best describes the effect of an operating lease on a firm's Return on Assets (ROA)?

What is a 'direct lease'?

What is the primary reason that a firm's decision to lease or buy an asset is considered a financing decision?

For a lease to be qualified by the IRS for tax deduction of payments, it must not include a bargain purchase price option. What is the rationale for this rule?

In the context of the lease-versus-buy decision for Xomox, what is the 'net advantage of leasing' (NAL)?

A firm with a 34 percent tax rate can borrow at 7.57575 percent. What is the correct rate to discount the nearly riskless cash flows associated with its lease-versus-buy decision?

What is the primary conclusion about the value of a leasing deal when both the lessor and lessee are subject to the same interest and tax rates, and transaction costs are ignored?

How can leasing be used to reduce uncertainty for a lessee?

What are the two components of the incremental cash flow in Year 1 of a lease-versus-buy analysis, as shown in Table 21.3 for Xomox?

According to the analysis of debt displacement, what is the value of the additional debt capacity a firm gains by purchasing an asset instead of leasing it?

In a sale and leaseback transaction, what are the two immediate consequences for the lessee?

Which of the following accounting treatments is required for a capital lease but not an operating lease?

Super Sonics Entertainment is considering leasing a machine with year-end payments of $145,000 for five years. The company can issue bonds at 9 percent interest and has a corporate tax rate of 35 percent. What is the appropriate discount rate for the lease cash flows?

What is the primary reason the IRS is concerned about the structure of lease contracts?

Why might a firm with a high tax rate choose to lease an asset from a lessor with a low or zero tax rate?

A firm has the choice of buying a machine for $540,000 or leasing it with year-end payments of $145,000 for five years. The firm's after-tax cost of debt is 5.85 percent. The machine is depreciated straight-line over five years, and the firm's tax rate is 35 percent. What is the Net Advantage to Leasing (NAL)?

What is the primary reason leasing can be considered a form of 'off-balance sheet financing'?

A firm is considering a lease with an initial cost of $620,000, depreciated straight-line over three years. The lessor can borrow at 7 percent, the lessee at 9 percent, and the tax rate is 34 percent for both. What is the key effect of the different borrowing rates on the NAL calculation?

Which of the following is NOT a characteristic of a financial lease?

A firm purchases a machine for $100,000, financed with $60,000 of debt, maintaining its optimal capital structure. If the firm instead leases the machine, and the lease is a $100,000 liability, how must the firm's other debt change to maintain the same liability-to-equity ratio?

What is the reason that transaction costs can make leasing a more attractive option than buying and selling an asset?

Why are some firms, such as manufacturers, willing to act as lessors for their own products?

If a firm with a 35 percent tax rate can borrow at 9 percent, what is the annual after-tax lease payment for a pre-tax lease payment of $145,000?

The Net Advantage to Leasing (NAL) for Wildcat Oil Company on a drilling system is positive. What is the maximum lease payment that would be acceptable to the company?

According to FAS 13, if a lease term is 8 years and the estimated economic life of the asset is 10 years, must the lease be capitalized?

What is the primary characteristic of the nonrecourse loan used in a leveraged lease?

If a firm with a 34 percent tax rate can borrow at 10 percent, and it is surprised to learn it has a guaranteed future after-tax liability of $106.60 in one year, by how much must its optimal debt level be lowered today?

Why might a small, newly formed firm be more inclined to lease an asset than a large, established blue-chip corporation, from a risk-reduction perspective?

What are the two alternative valuation methods presented in the textbook to calculate the Net Advantage to Leasing, besides the standard discounting of incremental cash flows?

What is the primary reason why '100 percent financing' is considered a bad reason for leasing?

In the Xomox example, if the company chooses to lease, it saves the $10,000 purchase price. How is this represented in the incremental cash flow analysis (Table 21.3)?

If a lease provides a Net Advantage to Leasing (NAL) of -$87.68 to the lessee, what is the NPV of the same lease to the lessor, assuming both parties have the same tax rate and borrowing costs?

Why are assets that are highly sensitive to maintenance and usage decisions more likely to be purchased than leased?

In the analysis of the Xomox lease, the total incremental cash flow from leasing relative to buying at Year 0 is $10,000, and the total annual outflow from Year 1 to Year 5 is $2,330. What does the negative final NAL of -$87.68 imply?