Chapter 16 Flashcards
1) Asset-based lending is:
a) Based on an underlying asset that serves as collateral in the event of default
b) Financing that is tied directly to a particular asset
c) A and B
d) None of the above
c
2) Frank owns a large dump truck. Charles offers to pay Frank $1,500 per month for 36 months’ use of the truck. If Frank accepts the offer, then:
a) Frank is the lessee and Charles is the lessor
b) Frank is the lessor and Charles ibs the lessee
c) Frank and Charles are lessors
d) Frank and Charles are lessees
b
3) The Quebeclease Company offers La Presse a lease on a large printing press. The current value of the printing press is $50,000 and it is expected to have a market value of $30,000 in 5 years. The annual lease payments are $8,000 per year for five years. At the end of the lease, La Presse has the right to buy the printing press for $5,000. This is an example of:
I. Asset-based financing
II. A lease that is likely to be considered a conditional sales agreement by the CRA
III. A sale and leaseback agreement
a) I only
b) II only
c) I and II only
d) II and III only
b
4) In an operating lease, the ____________ holds title to the asset.
a) Lessee
b) Lessor
c) Supplier
d) A or B
b
5) The lease that is most like a rental agreement is the:
a) Capital lease
b) Financial lease
c) Equipment lease
d) Operating lease
d
8) Before 1989, what was the benefit of the sale and leaseback agreement?
a) A loophole in the tax laws.
B) An illegal transfer of costs between lessee and lessor.
c) A mutual benefit between companies in different countries
d) More important in the 1990s.
a
11) Which of the following are characteristics of financial or capital leases?
I. The lease term is equal to 75 percent or more of the economic life of the leased property.
II. The present value of the minimum lease payments is equal to 70 percent or more of the fair value of the leased property at the inception of the lease.
III. Provisions are made such that ownership of the leased property is transferred to the lessee at the end of the lease term.
a) I and II
b) II and III
c) I and III
d) I, II and III
c
12) The residual value is a ____________ cash flow, from the point of view of the lessee.
a) Positive
b) Negative
c) non-existent (since the lessee does not own the asset)
d) positive or negative, depending on the tax rate
b
13) All of the following must be included on a company’s balance sheet except:
a) Capital leases
b) Sale and leaseback agreements
c) Operating leases
d) Leveraged leases
c
14) Leasing, and its respective effects on the firm, is very similar to ___________ financing.
a) Equity
b) Debt
c) Guaranteed
d) Trade
b
16) An operating lease compared to a financial lease will result in:
a) higher net income in the early years and no difference in net income in the later years.
b) higher net income in the early years and lower net income in the later years.
c) lower net income in the early years and higher net income in the later years.
d) no difference as the classification of the lease has no effect on net income.
b
17) Compared with an operating lease, a financial lease will have:
a) lower cash flow from operations (CFO) and higher cash flow from financing (CFF)
b) higher CFO and lower CFF
c) higher CFO and higher CFF
d) the same CFO and CFF
b
18) Compared with a financial lease, an operating lease will be associated with:
a) higher earnings per share
b) lower earnings per share
c) no difference in earnings per share
d) impact on earnings per share cannot be determined as operating leases are off-balance sheet items
a
19) Canada Lease Co. is considering switching from using operating leases to financial leases. The expected impact on its stock price is:
a) The price should fall as the earnings per share will decline.
b) The price should not change as the ROA does not change.
c) The price should not change as the total cash flows will not change.
d) The price should rise as the cash flow from operations
c
20) RonCo Company is considering a recycling project. The project will result in a decrease in their garbage disposal costs. The acquisition cost of the recycling machine is $100,000. The present value of the depreciation tax shield (CCA) is $35,000 and the machine is expected to have a zero salvage value. The firm can lease the machine instead of buying it – the present value of the before-tax lease payments is $60,000 and the present value of the tax savings from the lease payments is $20,000. Should the firm lease the recycling machine?
a) Yes, the NPV of leasing is $60,000.
b) Yes, the NPV of leasing is $25,000.
c) No, the NPV of leasing is -$40,000.
d) No, the NPV of leasing is -$175,000
b
