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Leasing

1. A key difference between a financial lease and operating lease is that a financial lease often includes a call option, while an operating lease often includes an option to purchase. 2. Leasing exists primarily because intermediate-term loans can be difficult to obtain, and leasing provides different benefits to companies, financial institutions, and individuals in terms of asset ownership. 3. To analyze whether debt or lease financing is preferable, one should compare the net present values of each alternative using the cost of capital as the discount rate.

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Samar Malik
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842 views

Leasing

1. A key difference between a financial lease and operating lease is that a financial lease often includes a call option, while an operating lease often includes an option to purchase. 2. Leasing exists primarily because intermediate-term loans can be difficult to obtain, and leasing provides different benefits to companies, financial institutions, and individuals in terms of asset ownership. 3. To analyze whether debt or lease financing is preferable, one should compare the net present values of each alternative using the cost of capital as the discount rate.

Uploaded by

Samar Malik
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MCQ

.
1 One difference between a financial lease and operating lease is that:
there is a often a call option in a financial lease.

there is often an option to buy in an operating lease.

an operating lease is often cancellable by the lessee.

a financial lease is often cancellable by the lessee.

.
2 The principal reason for the existence of leasing is that:
intermediate-term loans are difficult to obtain.

this is a type of financing unaffected by changes in tax law.

companies, financial institutions, and individuals derive different benefits

from owning
assets.

leasing is a renewable source of intermediate-term funds.

.
3 A way to analyze whether debt or lease financing would be preferable is to:
compare the net present values under each alternative, using the cost of

capital as the discount rate.


compare the net present values under each alternative, using the after-tax

cost of borrowing as the discount rate.

compare the payback periods for each alternative.

compare the effective interest costs involved for each alternative.

4. A conventional revolving credit agreement allows a firm:


to borrow a fixed amount for the entire commitment period.

to borrow for a short-period with a right to renew the loan during the

commitment period.

to possibly include a provision to convert the credit agreement into a term

loan contract at maturity.

to do all of the above.

5. The type of lease that includes a third party, a lender, is called a(n):
sale and leaseback.

direct leasing arrangement.

leveraged lease.

operating lease.

.
6 One advantage of a financial lease is that:
it has a shorter maturity than term loans.
it never appears as a liability on the balance sheet.

it eliminate the needs to make periodic payments.

it provides a way to indirectly depreciate land.

7.Medium-term notes (MTNs) have maturities that range up to


one year (but no more).

two years (but no more).

ten years (but no more).

thirty years (or more)

8. A direct lease, a sale and leaseback, and a leveraged lease are all examples of
operating leases.

financial leases.

full-service leases.

"off-balance sheet" methods of financing.


9. A/An ________ is an agreement that provides the lessee with use of an asset on a
period-by-period basis.
a. financial lease

b. operating lease

c. sale and leaseback

d. direct lease

10. A leveraged lease is a three-sided agreement among the following:


a. lessee, lessor and lender.

b. lessor, commercial bank, and insurance company.

c. a and b.

d. None of the above.

11. Which of the following is used as security for a mortgage bond?


a. First lien on the asset.

b. Assignment of the lease.

c. Direct guarantee from the government.

d. All of the above.

12. The major advantage of leasing is that it _________.


a. provides flexible financing

b. provides lower payments

c. avoids risks of obsolescence.

d. All of the above

13. The primary disadvantage of leasing is the ________.


a. lessee may not cancel the lease without paying a substantial penalty

b. loss of salvage value

c. lease payments must be made during bankruptcy

d. cost

14. Which of the following is the first step in analyzing a lease arrangement?
a. Compute the annual after-tax lease income.

b. Compute the lessor's amount to be amortized.

c. Convert the lease income requirement of the lessee.

d. Compute the lease payment required from the lessee.

15. The ________ of the asset equals the purchase price plus installation and shipping
charges.
a. installed cost

b. present value

c. present value of the after-tax salvage value

d. None of the above.

16. Subject to ________, firms that lease a portion of their assets may deduct the full
amount of the lease payment for tax purposes.
a. lease payments

b. installed costs

c. FASB Standard No. 13

d. a series of IRS guidelines

17. FASB Standard No. 13 requires lessees to ________.


a. capitalize certain types of leases

b. pay cash

c. lease less than 30 years

d. make improvements to the asset

18. In the case of a leveraged lease, the lessor must provide a minimum of 20 percent
equity.
a. True.

b. False.

19. Limited-use property may be leased.


a. True.

b. False.

20. A large proportion of all financial leases currently written in the U.S. are leveraged
leases.
a. True

b. False

21. A financial lease may originate as a service lease.


a. True.

b. False.

22. An operating lease is a noncancelable agreement.


a. True.

b. False.

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