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Exam 16: Leasing

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Question 1

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You are the CFO of a company.You are considering leasing photocopiers from the manufacturer instead of purchasing them for $200,000.You can borrow at 9.0% and the corporate tax rate is 35.0%.The lease payment will be $50,000 each year for 5 years, beginning immediately.At the end of the 5 years, the photocopiers will be worthless.Assume that the photocopiers can be depreciated by $40,000 per year for 5 years, for tax purposes.Should the firm lease the photocopiers?

A) Yes, the IRR of the lease incremental cash flows is greater than the after-tax cost of borrowing.
B) No, the IRR of the lease incremental cash flows is less than the after-tax cost of borrowing.
C) Yes, the IRR of the lease incremental cash flows is less than the after-tax cost of borrowing.
D) No, the IRR of the lease incremental cash flows is greater than the after-tax cost of borrowing.

E) All of the above
F) None of the above

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Question 2

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Under ASPE criteria, 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

E) A) and D)
F) None of the above

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Question 3

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A firm is considering leasing a printing machine.The lease lasts for 3 years.The lease calls for 3 payments of $4,000 per year with the first payment occurring immediately.The machine would cost $7,500 to buy and would be straight-line depreciated (tax purpose) to zero salvage value over 3 years.The firm can borrow at 5%, and has a corporate tax rate is 30%.What is the NPV of the lease?

You are the manager of a sales division, and are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for 8 years at $60,000 per year with payments due at end of each year.The company has a tax rate of 40.0% and a CCA rate of 10.0% on vehicles.If the company buys the cars and finances the purchase with a loan, they will pay 7.0% in interest.Assume that after the term of the lease is over, the salvage value of the cars will be zero.What is the NPV of the lease, based on half-year rule for CCA in the first year?

What are the possible limitations to the idea that the value of the firm is immune to leasing?

You are a bank manager and are evaluating the financial statements of one of your corporate clients.You notice the size of the balance sheet to be larger because of IFRS changes with respect to leasing.Does that mean the corporation is now worth more?

Your company requires a new truck to expand its delivery range.The cost of this truck is $38,000.The life of this asset should be 6 years with a $5,500 salvage value.Inquiries to a few banks have shown that a loan for the full amount is available with a yearly interest payment of 14%.Another option is to add this asset to the lease you already have.The leasing company has told you it will purchase the truck and lease it to you for an initial payment of $8,300 and an annual payment of $8,300 at the beginning of each of the next 6 years (a total of 7 payments).The company's tax rate is 38%, and the CCA rate of the asset pool of the truck is 20% with half-year rule applicable in the first year. a)Will you proceed with the lease or buy the asset?

Considerations arising from changes in accounting standards with respect to leasing include:

All of the following must be included on a company's balance sheet except:

You are the manager of a sales division, and are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for 8 years at $60,000 per year with payments due at end of each year.The company has a tax rate of 40.0% and a CCA rate of 10.0% on vehicles.If the company buys the cars and finances the purchase with a loan, they will pay 7.0% in interest.Assume that after the term of the lease is over, the salvage value of the cars will be zero.What is the NPV of the lease, based on accelerated investment incentive for CCA in the first year?

Leasing, and its respective effects on the firm, is very similar to ______ financing.

RonCo Company is considering a recycling project.The project will result in a significant 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 and why or why not?

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 five years.The annual lease payments are $8,000 per year, due at the beginning of each of the next 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.an operating lease II.a financial lease III.a sale and leaseback agreement

Which of the following is not a reason for leasing?

Under U.S.GAAP, compared with an operating lease, a financial lease will have:

Frank has just started his first business-a snow removal company.In order for his business to be successful, he will need three large industrial-strength snow blowers.Each snow blower will cost $30,000.Provide three advantages leasing offers this small business.

Which of the following are reasons for leasing from the lessee's point of view?

The lease that is most like a rental agreement is:

Air Canada sold an airplane and used the proceeds to improve its financial position.It then leased the airplane back in order to continue the use of the asset.This is an example of:

The lease term is four years, while the economic life of the asset is five years.The annual lease payment is $10,000 at the beginning of each year, and the appropriate discount rate is 7.0%.There is no salvage value at the end of the lease.The lessee uses the straight-line depreciation method for both accounting and tax purposes. a)Estimate the fair market value of the asset. b)Estimate the change in NI, CFO, and CFF at the end of the first year if a firm decides to enter into the lease agreement.