Q&A Hero

Q: Which one of the following had the highest average return for the period 1926-2012? A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bonds

Q: Which one of the following is considered the best method of comparing the returns on various-sized investments? A. total dollar return B. real dollar return C. absolute dollar return D. percentage return E. variance return

Q: If you multiply the number of shares of outstanding stock for a firm by the price per share, you are computing the firm's: A. equity ratio. B. total book value. C. market share. D. market capitalization. E. time value.

Q: Which one of the following should be used to compare the overall performance of three different investments? A. holding period dollar return B. capital gains yield C. dividend yield D. holding period percentage return E. effective annual return

Q: When we refer to the rate of return on an investment, we are generally referring to the: A. capital gains yield. B. effective annual rate of return. C. total percentage return. D. dividend yield. E. annualized dividend yield.

Q: Capital gains are included in the return on an investment: A. when either the investment is sold or the investment has been owned for at least one year. B. only if the investment is sold and the capital gain is realized. C. whenever dividends are paid. D. whether or not the investment is sold. E. only if the investment incurs a loss in value or is sold.

Q: Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before reselling it. What is the value of "m" when computing the annualized return on this investment? A. .25 B. .33 C. .40 D. 3.00 E. 4.00

Q: An annualized return: A. is less than a holding period return when the holding period is less than one year. B. is expressed as the summation of the capital gains yield and the dividend yield on an investment. C. is expressed as the capital gains yield that would have been realized if an investment had been held for a twelve-month period. D. is computed as (1 + holding period percentage return)m, where m is the number of holding periods in a year. E. is computed as (1 + holding period percentage return)m, where m is the number of months in the holding period.

Q: Which one of the following statements is correct concerning the dividend yield and the total return? A. The dividend yield can be zero while the total return must be a positive value. B. The total return can be negative but the dividend yield cannot be negative. C. The total return must be greater than the dividend yield. D. The total return plus the capital gains yield is equal to the dividend yield. E. The dividend yield exceeds the total return when a stock increases in value.

Q: The average compound return earned per year over a multi-year period when inflows and outflows are considered is called the: A. total return. B. average capital gains yield. C. dollar-weighted average return. D. arithmetic average return. E. geometric average return.

Q: The average compound return earned per year over a multi-year period is called the: A. total return B. average capital gains yield C. variance D. arithmetic average return E. geometric average return

Q: The arithmetic average return is the: A. summation of the returns for a number of years, t, divided by (t - 1). B. compound total return for a period of years, t, divided by t. C. average compound return earned per year over a multi-year period. D. average squared return earned in a single year. E. return earned in an average year over a multi-year period.

Q: A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n): A. normal distribution. B. variance distribution. C. expected rate of return. D. average geometric return. E. average arithmetic return.

Q: The standard deviation is a measure of: A. volatility. B. total return. C. capital gains. D. changes in dividend yields. E. changes in the capital gains rate.

Q: The additional return earned for accepting risk is called the:A. inflated return.B. capital gains yield.C. real return.D. riskless rate.E. risk premium.

Q: The risk premium is defined as the rate of return on:A. a risky asset minus the risk-free rate.B. the overall market.C. a U.S. Treasury bill.D. a risky asset minus the inflation rate.E. a riskless investment.

Q: The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the: A. risk premium. B. deflated rate of return. C. risk-free rate. D. expected rate of return. E. market rate of return.

Q: The risk-free rate is: A. another term for the dividend yield. B. defined as the increase in the value of a share of stock over time. C. the rate of return earned on an investment in a firm that you personally own. D. defined as the total of the capital gains yield plus the dividend yield. E. the rate of return on a riskless investment.

Q: When the total return on an investment is expressed on a per-year basis it is called the: A. capital gains yield. B. dividend yield. C. holding period return. D. effective annual return. E. initial return.

Q: The capital gains yield is equal to: A. (Pt - Pt + 1 + Dt + 1)/Pt + 1. B. (Pt + 1 - Pt + Dt)/Pt. C. Dt + 1/Pt. D. (Pt + 1 - Pt)/Pt. E. (Pt + 1 - Pt)/Pt + 1.

Q: The dividend yield is defined as the annual dividend expressed as a percentage of the: A. average stock price. B. initial stock price. C. ending stock price. D. total annual return. E. capital gain.

Q: The total dollar return on a share of stock is defined as the:A. change in the price of the stock over a period of time.B. dividend income divided by the beginning price per share.C. capital gain or loss plus any dividend income.D. change in the stock price divided by the original stock price.E. annual dividend income received.

Q: Frank's Auto can purchase new equipment for $136,000 cash that has a life of four years and a pretax residual value of $7,000 at the end of Year 4. Frank's uses MACRS depreciation with rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. Frank's pretax cost of debt is 7.5 percent and its tax rate is 21 percent. However, Frank's does not expect to owe any taxes for at least five years. The equipment can also be leased for $38,900 a year. What is the incremental annual cash flow for Year 4 if the company decides to lease rather than purchase this equipment? A) −$45,900 B) −$31,900 C) $38,900 D) $45,900 E) $31,900

Q: CT Motors borrows money at 8.35 percent, uses straight-line depreciation, and has a tax rate of 21 percent. The firm's break-even aftertax annual lease payment on a machine is $15,306. What amount would CT Motors pay to the lessor annually to break-even? A) $18,992 B) $18,403 C) $17,620 D) $19,914 E) $19,375

Q: Southern Mfg. can save $950,000 in annual pretax costs by acquiring $2.6 million of new equipment that would be depreciated straight-line to zero over four years. Assume the equipment would have an aftertax residual value of $500,000 at the end of four years. Southern's tax rate is 23 percent and its pretax cost of debt is 9 percent. Lambert Leasing has offered to lease this equipment in exchange for annual payments which would be payable at the beginning of each year. What is the maximum lease payment that would be acceptable to Southern Mfg? A) $612,307 B) $634,515 C) $548,200 D) $651,646 E) $662,937

Q: Turner's has decided to modernize its production facility by acquiring $2.4 million in new fixed assets that will be depreciated straight-line to zero over five years. This equipment will have no salvage value but will provide $1,880,000 in annual pretax cost savings. Turner's tax rate is 21 percent and its pretax cost of debt is 8.6 percent. Thrifty Leasing has offered a 5-year lease on this equipment with annual payments due at the beginning of each year. What is the maximum lease payment that would be acceptable to Turner's? A) $593,231 B) $570,497 C) $404,506 D) $406,318 E) $611,472

Q: A scanner that costs $2.8 million would be depreciated straight-line to zero over four years and then be worthless. Assume that both a lessor and a lessee have tax rates of 21 percent and borrow at a pretax rate of 7.5 percent. However, the lessee has operating losses and will not pay any taxes for at least the next five years. What range of lease payments will allow a lease on this scanner to be profitable for both parties? A) $814,026 to $815,123 B) $804,026 to $805,481 C) $835,024 to $835,989 D) $845,123 to $846,417 E) $825,123 to $826,825

Q: A machine that will be worthless after five years costs $3.2 million. This machine can be leased for $760,000 per year for five years. Assume the machine, if purchased, would be depreciated straight-line to zero over its 5-year life. What is the net advantage to leasing this machine for a company that will pay no taxes over the lease period and has a pretax cost of borrowing of eight percent? A) $282,706 B) $165,540 C) $121,409 D) $212,809 E) $228,315

Q: Suppose you are considering leasing a car. The price you and the dealer agree on is $32,000, which is the base capitalized cost. Other costs added to the capitalized cost price include the acquisition fee, insurance, and, if elected, the extended warranty. Assume these costs are $390. Capitalization cost reductions include any down payment, trade-in value, or rebates. Assume you make a down payment of $2,600, and there is no trade-in or rebate. If you drive 11,000 miles per year, the lease-end residual value for this car will be $18,700 after three years. The lease factor, which is the interest rate on the loan, is the APR of the loan divided by 2,400. The lease factor the dealer quotes you is .00208. The monthly lease payment consists of three parts; a depreciation charge, a finance fee, and sales tax. The depreciation fee is the net capitalization cost minus the residual value, divided by the term of the lease. The net capitalization cost is the cost of the car minus any cost reductions plus any additional costs. The finance fee is the net capitalization cost plus the residual value, times the money factor, and the monthly sales tax is the depreciation charge plus the finance fee, times the tax rate. What is your monthly lease payment for a 36-month lease if the sales tax is 7 percent? A) $329 B) $343 C) $380 D) $402 E) $438

Q: An asset costs $640,000 and would be depreciated in a straight-line manner over its 4-year life. It will have no salvage value. The tax rate is 21 percent and the pretax cost of borrowing is 9 percent. What lease payment on this asset will make the lessee and the lessor equally well off? A) $185,717 B) $194,141 C) $167,778 D) $197,235 E) $165,026

Q: Wildcat Oil Company is trying to decide whether to lease or buy a new computer system. The system would cost $6.7 million that would be depreciated straight-line to zero over its 4-year life and would provide $1.2 million in annual pretax cost savings. Wildcat's tax rate is 21 percent and its pretax borrowing cost is 9 percent. Lambert Leasing has offered to lease the system to Wildcat for payments of $1,850,000 per year for four years. Lambert's requires its lease payments to be paid at the beginning of each year. Lambert would also require Wildcat to pay a refundable $270,000 security deposit at the inception of the lease. What is the NAL of leasing the system? A) $141,287 B) $157,395 C) $60,318 D) $138,828 E) $134,719

Q: If your firm purchases a machine costing $2 million, it would depreciate that machine straight-line to zero over four years, after which time the machine would be worthless. Your firm has a tax rate of 23 percent and borrows funds at 6 percent before taxes. Your firm is also considering leasing this machine. How much would the lease payment have to be in order for both the lessor and your firm to be indifferent about leasing? A) $601,316 B) $521,909 C) $552,200 D) $563,333 E) $576,693

Q: A machine costs $2.2 million and would be depreciated straight-line to zero over four years after which it would be worthless. This machine can be leased for $645,000 per year for four years. Assume a tax rate of 21 percent and a pretax borrowing rate of 7 percent. What is the net advantage to leasing from the lessor's viewpoint? A) −$10,621 B) −$9,988 C) −$4,464 D) −$12,082 E) −$8,840

Q: You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $3.5 million and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $1,025,000 per year for four years. Assume the tax rate is 22 percent. You can borrow at 7.5 percent before taxes. What is the net advantage to leasing from your company's standpoint? A) $46,217 B) $49,131 C) $50,776 D) $53,468 E) $54,117

Q: Ft. Myers Marina can lease $31,800 of equipment for $7,200 a year for five years. If purchased, the equipment would be depreciated over its 5-year life and then have a resale value of $5,900. The firm uses straight-line depreciation, borrows at 8 percent, and has a tax rate of 21 percent. What is the net advantage to leasing? A) −$851 B) −$1,022 C) −$961 D) −$808 E) −$1,211

Q: The lease payments on $19,900 of equipment would be $3,800 a year. The equipment has a life of six years after which it is expected to have a resale value of $2,100. Assume a lessee uses straight-line depreciation, borrows at 11.5 percent, and has a tax rate of 23 percent. What amount should be included in the Year 6 cash flows when that firm computes the NAL? A) −$5,306 B) −$6,234 C) −$4,471 D) −$4,407 E) −$5,512

Q: A lessor will charge $13,800 a year for four years as lease payments on $47,800 of equipment. The equipment has a life of four years after which it should resell for $8,400. Your firm uses straight-line depreciation, borrows at 10 percent, and has a tax rate of 25 percent. What is the amount of the Year 4 cash flows when computing the NAL? A) −$16,650 B) −$19,638 C) −$21,738 D) −$15,748 E) −$17,038

Q: Pizza Shoppes is considering either leasing or buying a new $24,000 oven. The lease payments would be $8,700 a year for three years. The oven would be depreciated on a straight-line basis over a three-year life and then be resold for $5,500. The firm borrows at 7 percent and has a tax rate of 21 percent. What is the net advantage to leasing? A) $2,809 B) $1,833 C) −$2,084 D) −$2,760 E) −$1,899

Q: Williams' Paints is weighing a lease versus a purchase of $312,000 of fixed assets. The assets would be depreciated to zero over their 4-year life after which time they can be sold for an estimated $76,000. The firm uses straight-line depreciation and can borrow at 8 percent. The equipment can be leased for $66,000 a year for four years. The firm does not expect to owe any taxes for the next five years because of its operating losses. What is the net advantage to leasing? A) $9,841 B) $11,904 C) $24,922 D) $28,208 E) $37,537

Q: Cool Treats is considering either leasing or buying a new $30,900 freezer unit. The lessor will charge $11,900 a year for a two-year lease. The freezer has a two-year life after which time it is expected to have a resale value of $11,500. Cool Treats uses straight-line depreciation, borrows money at 7.5 percent, and has sufficient operating losses to offset any potential taxable income the firm might have over the next four years. What is the net advantage to leasing? A) −$167 B) $238 C) $258 D) −$270 E) −$419

Q: A lessor will charge $30,500 a year for a five-year lease on equipment costing $136,000. The equipment has a 5-year life after which time it will be worthless. The lessee uses straight-line depreciation, has a tax rate of 21 percent, and borrows money at 8 percent. What is the net advantage to leasing? A) $10,574 B) $5,507 C) $12,638 D) $6,283 E) $11,528

Q: Cayman Productions is considering either leasing or buying some equipment. The lessor will charge $26,900 a year for a three-year lease. The purchase price is $72,600. The equipment has a three-year life after which time it will be worthless. The firm uses straight-line depreciation, borrows money at 8 percent, and expects sufficient losses to offset any taxes which otherwise might be owed for the next four years. What is the net advantage to leasing? A) −$3,395 B) −$1,299 C) $3,276 D) $1,344 E) $2,858

Q: The Box Store is considering the purchase of a delivery truck costing $49,000. The truck can be leased for three years at $19,500 per year or it can be purchased at an interest rate of 7.5 percent. The estimated life of the truck is three years. The corporate tax rate is 21 percent. The company does not expect to owe any taxes for the next several years due to large operating losses. The firm uses straight-line depreciation. What is the net advantage to leasing? A) $1,710 B) $864 C) $1,304 D) −$1,006 E) $1,794

Q: Do-Rite Construction is evaluating the lease versus the purchase of a machine costing $168,000 that would be depreciated using MACRS over a four-year period, after which the machine would be worthless. MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. The machine could be leased for $46,500 a year for four years. The firm can borrow at 8.5 percent and has a tax rate of 21 percent. However, the firm does not expect to pay any taxes for the next five years. What is the net advantage to leasing? A) −$4,502 B) $15,685 C) $18,640 D) −$1,651 E) $3,277

Q: National Rail can purchase equipment for $386,000 that would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. The equipment will be worthless after four years. The equipment can be leased for four years at $110,500 a year. The firm can borrow at 8 percent and has a tax rate of 21 percent. What is the net advantage to leasing? A) $11,789 B) $10,862 C) $13,742 D) $12,087 E) $10,127

Q: CTS is analyzing the acquisition of $284,000 equipment that would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. After that time, the equipment would be worthless. The equipment can be leased for $82,100 a year for four years. The firm can borrow at 6 percent and has a tax rate of 23 percent. What is the net advantage to leasing? A) $1,982 B) $607 C) $11 D) −$1,847 E) −$2,050

Q: Pressley's Inc. can purchase some equipment for $620,000 that has a life of four years, after which it will be worthless. The pretax cost of borrowed funds is 7.8 percent and the corporate tax rate is 21 percent. The firm expects significant operating losses for at least the next five years and thus expects to pay no taxes during this period. The equipment can be leased for $182,000 a year. What is the net advantage to leasing? A) $14,500 B) −$3,431 C) $13,754 D) $20,628 E) −$7,967

Q: Steven's Auto is trying to decide whether to lease or buy some new equipment costing $23,000 that has a life of three years, after which it will be worthless. The aftertax discount rate is 5.8 percent. Assume the annual depreciation tax shield is $1,610 and the aftertax annual lease payment is $6,500. What is the net advantage to leasing? A) $1,241 B) −$397 C) $1,585 D) $1,315 E) −$863

Q: Rosewood Furniture is considering purchasing equipment costing $69,000 which it expects to sell at the end of Year 4 for $22,500. The firm uses MACRS depreciation with rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $18,800 a year for four years. The firm can borrow at 7.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 4 if the company decides to lease the equipment rather than purchase it? A) −$50,430 B) −$42,730 C) −$33,701 D) −$32,930 E) −$50,684

Q: A firm can either lease or buy some equipment costing $72,900. The lease payments would be $18,500 a year for four years. The equipment has a 4-year life after which it is expected to have a resale value of $3,600. The firm uses straight-line depreciation over the life of the asset, borrows money at 11 percent, and has a tax rate of 21 percent. The company does not expect to owe any taxes for at least four years because of its operating losses. What is the incremental cash flow for Year 3 if the company decides to lease rather than purchase the equipment? A) −$29,165 B) −$21,821 C) −$18,500 D) −$18,559 E) −$17,635

Q: MIG Tools can either lease or buy some equipment. The lease payments would be $12,800 a year and the purchase price is $35,900. The equipment has a 3-year life after which it is expected to have a resale value of $5,000. The firm uses 100 percent bonus depreciation, borrows money at 8 percent, and has a tax rate of 21 percent. What is the incremental cash flow for Year 1 if the company decides to lease the equipment rather than purchase it? A) −$19,405 B) −$16,805 C) −$17,651 D) −$14,184 E) −$14,905

Q: Business Services needs some office equipment costing $37,000. The equipment has a 4-year life and would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $10,300 a year. The firm can borrow at 7.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 3 if the company decides to lease the equipment rather than purchase it? A) −$8,898 B) −$9,286 C) −$9,389 D) −$9,407 E) −$9,289

Q: Food Express is analyzing the purchase of some new equipment costing $73,000, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $19,600 a year for four years. The firm can borrow money at 9.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 2 if the company decides to lease the equipment rather than purchase it? A) −$22,297 B) −$22,797 C) −$21,312 D) −$21,798 E) −$22,821

Q: Lester's is analyzing a purchase versus a lease for some equipment costing $52,800, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The firm can borrow money at 6.5 percent and has a tax rate of 21 percent. What is the amount of the depreciation tax shield in Year 3? A) $1,758 B) $1,643 C) $1,941 D) $2,012 E) $2,221

Q: Val's Pizzeria is contemplating leasing versus buying some new ovens costing $28,000, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The ovens can be leased for $12,500 a year. The firm can borrow money at 8 percent and has a tax rate of 21 percent. What is the amount of the depreciation tax shield in Year 2? A) $3,019 B) $3,219 C) $2,613 D) $2,325 E) $3,608

Q: The Corner Store is evaluating a lease on some equipment that costs $79,000 and has a two-year life. The pretax cost of borrowed funds is 8.4 percent and the tax rate is 21 percent. What is the amount of the annual depreciation tax shield for Year 1 and Year 2 if the firm uses 100 percent bonus depreciation? A) $16,590; $0 B) $0; $16,590 C) $8,295; $8,295 D) $0; $0 E) $16,590; $8,295

Q: Northern Lights is trying to decide whether to lease or buy some new equipment. The equipment costs $68,000 and has a life of three years. The company has a tax rate of 21 percent, a cost of borrowed funds of 8.75 percent, and uses straight-line depreciation over the life of the equipment. What is the amount of the annual depreciation tax shield? A) $4,760 B) $5,878 C) $6,937 D) $7,087 E) $14,960

Q: Jamestown Supply is considering leasing some equipment for four years at an annual payment of $16,900. The firm has a pretax borrowing cost of 7.5 percent and a tax rate of 21 percent. What is the amount of the aftertax lease payment? A) $16,103 B) $12,250 C) $12,667 D) $13,351 E) $13,820

Q: Rodriquez Co. is considering leasing some equipment that costs $58,000 and has a life of four years. The company has a tax rate of 21 percent and a cost of borrowed funds of 7.5 percent. If the annual lease payment is $15,600, what is the amount of the aftertax lease payment? A) $9,433 B) $12,324 C) $9,863 D) $14,058 E) $12,929

Q: Which one of these is considered to be the best reason for obtaining a capital lease? A) To benefit from the implicit interest rate of a lease B) To extend payments over a period of time C) To avoid the restrictive covenants often found in loan agreements D) To reduce the liabilities shown on the firm's balance sheet E) To obtain 100 percent financing

Q: Which one of the following is most likely the primary reason why a lessee opts to lease an asset on a short-term basis rather than buy that asset? A) To keep the asset off the balance sheet B) To avoid taxes C) To lower transaction costs D) To increase collateral E) To provide nonrecourse protection

Q: The most cited reason why firms enter into lease agreements is to: A) lower taxes. B) improve cash flows. C) reduce uncertainty. D) avoid balance sheet reporting. E) bypass restrictive loan covenants.

Q: Which one of the following statements is correct concerning taxes and leasing? A) Tax reduction is a legitimate reason for leasing. B) The lessee should be the party with the higher tax bracket. C) Generally speaking, lessors tend to benefit from leases while lessees do not. D) If a firm has significant net operating losses, it should be the lessor in a lease. E) You should only lease an asset if the lease will be fully amortized.

Q: A firm will be indifferent to leasing versus buying when the: A) NPV from leasing is zero. B) asset is fully depreciated. C) IRR from leasing is zero. D) asset can be purchased at the end of the lease. E) firm's tax rate is zero.

Q: Assume a lessor and a lessee can borrow at the same rate and also pay taxes at the same rate. Given this, then a lease between these parties: A) will be a loss to both parties. B) benefits both parties by the same amount. C) is a zero-sum game. D) will be disallowed by the IRS. E) will always benefit the lessor at the expense of the lessee.

Q: You should lease rather than buy when the: A) IRR from leasing exceeds the aftertax cost of borrowing. B) annual loan payments for a purchase are less than the annual lease payments. C) NAL from leasing is positive. D) IRR from leasing exceeds the risk-free rate of return. E) asset's life is less than five years.

Q: You are comparing a lease to a purchase. When computing the net advantage to leasing you should discount the cash flows using the: A) pretax cost of borrowing. B) pretax risk-free rate. C) aftertax borrowing rate. D) aftertax risk-free rate. E) aftertax interest rate implied by the lease payments.

Q: The relevant discount rate for evaluating a lease is the firm's: A) cost of equity financing. B) pretax cost of borrowing. C) aftertax cost of borrowing. D) risk-free rate of return. E) market rate of return on short-term assets.

Q: The lost depreciation tax shield used in lease versus purchase analysis applies only when the lessee firm: A) commits to purchasing the leased asset at the end of the lease term. B) depreciates all of its assets on a straight-line basis. C) commits to a lease term of three years or longer. D) originally owned the equipment that it now plans to lease. E) has sufficient taxable income to offset that tax shield.

Q: The incremental cash flows of leasing consider all of the following except the: A) cost of the asset. B) lease payment amount. C) applicable tax rate. D) lost annual depreciation expense. E) cost of the operator for the leased asset.

Q: What does the IRS require if lease payments are to be tax deductible? A) The lease term must be less than the life of the asset. B) The lease payments must be less than comparable loan payments if the asset were purchased. C) The initial present value of the lease payments must be less than 90 percent of the asset cost. D) The lessee should have the option to purchase the asset at a discounted price at the end of the lease term. E) The lease must be primarily for business purposes.

Q: Assume the initial present value of the payments on a lease are equal to the cost of the leased asset. This capital lease is recorded as an asset on the balance sheet of the lessee in an amount equal to the: A) dollar amount of each lease payment multiplied by the total number of lease payments in the original agreement. B) dollar amount of each lease payment multiplied by the number of lease payments remaining. C) dollar amount of each lease payment multiplied by the number of lease payments per year. D) present value of the remaining lease payments. E) lesser of the present value of the remaining lease payments or the present value of the lease payments for a one-year period.

Q: Which one of the following is an indicator that a lease is an operating lease for accounting purposes? A) The lease transfers ownership of the asset to the lessee by the end of the lease term. B) The lessee will probably exercise the option to purchase the leased asset. C) The lease term represents a minor portion of the leased asset's economic life. D) The residual value plus the present value of the lease payments exceeds the value of the leased asset. E) The lessor has no use for the asset other than to lease it to the present lessee due to the specialized nature of that asset.

Q: Beginning in 2019, operating leases will be recorded: A) only on the books of the lessor. B) only on the income statement of the lessee as each lease payment is expensed. C) as an asset on the balance with a value equal to the estimated residual value of the leased asset. D) in the footnotes rather than on the balance sheet. E) on the balance sheet of the lessee.

Q: If a firm enters a sale and leaseback agreement, then: A) the lessor realizes an immediate cash inflow. B) the lease automatically becomes a nonrecourse lease. C) both the lessor and the lessee benefit. D) the lessor benefits while the lessee loses. E) the lessee must forfeit the right to repurchase the asset at a later date.

Q: 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: A) lessor is responsible for the loan payments whether or not the lessee pays the lease payments. B) lessee must pay both the lease payment and the loan payment. C) loan is considered paid in full if the lessee discontinues making the lease payments or terminates the lease early. D) lessor is only obligated to pay the loan payments as long as the lessor is collecting the lease payments. E) lender must pursue the lessor if the lessee fails to make the agreed upon lease payments.

Q: If a firm does not expect to owe taxes for a few years and needs some equipment, the firm generally should: A) lease the equipment and retain the tax benefits. B) lease the equipment with the lessor retaining the tax ownership of the asset. C) borrow the money to buy the asset and then depreciate it using MACRS depreciation. D) buy the equipment with cash and depreciate it using bonus depreciation. E) buy the equipment and depreciate it straight-line over the life of the asset.

Q: A financial lease: A) usually requires the lessor to maintain the leased asset. B) is generally cancelable without penalty if the lessee provides 30 days advance notice. C) is generally a partially amortized lease. D) is generally a short-term lease. E) may also be classified as a tax-oriented lease.

Q: 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) ________ lease. A) operating B) tax-oriented C) sale and buyback D) leveraged E) financial

Q: Which one of the following does not apply to the lessee of a sale and leaseback arrangement? A) May have the option to repurchase the asset at the end of the lease term B) Uses the asset C) Receives payment for the sale in the form of lease payments D) Forfeits ownership rights E) Receives cash from the sale of the asset