Question 1

In the lease versus buy decision, leasing is often preferable

Accepted Answer

A)   because, generally, no down payment is required, and there are no indirect interest costs.
B)   because lease obligations do not affect the firm's risk as seen by investors.
C)   because the lessee owns the property at the end of the least term.
D)   because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
E)   because it has no effect on the firm's ability to borrow to make other investments.F) All of the above
G) D) and E)

Question 2

Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)

Accepted Answer

A)   $5,734
B)   $6,023
C)   $6,324
D)   $6,640
E)   $6,972F) A) and B)
G) A) and E)

Question 3

In a synthetic lease a special purpose entity (SPE) is set up by a corporation that wants to acquire the use of an asset. The SPE borrows up to 97% of its capital, uses its funds to buy the asset, and then leases it to the sponsoring corporation on a short-term basis. This keeps both the asset and the debt off the sponsoring company's books.

Accepted Answer

A) True 
 B)False

Exam 19: Lease Financing

In the lease versus buy decision, leasing is often preferable

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Exam 19: Lease Financing

In the lease versus buy decision, leasing is often preferable

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified