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17 1. Which of the following statements is not true of a financial lease? ฀ A. It can be cancelled after the equipment is no longer needed B. It is a source of financing C. It is binding obligation for the lessee D. It lessee has the asset for most of its economic life

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2. In a net lease: ฀ ฀ A. The lessee pays for insurance, but does not maintain the asset B. The lessee pays to maintain, insure, and meet property tax obligations on the asset C. The lessor pays for insurance, maintenance, and property taxes D. The lessor and lessee split the maintenance, insurance, and property taxes 50:50 3. In a direct lease arrangement: ฀ ฀ A. The lessee selects the equipment and has the lessor buy it for lease B. The lessor buys the equipment, then looks for a lessee C. The lessee buys the asset, then arranges to sell it to lease it back D. The lessee owns the asset through a holding company 4. A leveraged lease requires a situation where: ฀ ฀ A. Lessee loaning part of the asset purchase to the lessor B. Lessor selling ownership of the leased asset to others C. Lessor borrows part of the asset's price D. Lessor loans the lessee funds to maintain the asset 5. A financial lease is also called a full-payout lease because: ฀ ฀ A. Lessee agrees to pay the full amount of the lease up front B. Lessor agrees to pay out the lease if the lessee defaults C. Lessee pays for full cost of the asset in present value terms D. Payout of the lease is guaranteed by insurance 6. Sale and lease-back leases involve: ฀ ฀ A. Real estate transactions only, where lessee and lessor swap land B. Situations where the user sells his property and leases it back C. Transactions where the land is sold to the lessee at the end of the lease D. Land ownership transfers part way through a lease agreement 7. Financial leases are a source of financing in the sense that: ฀ ฀ A. The lessor must find a source of financing to buy the asset B. The lessee must borrow money for his first lease payment C. The lessee avoids buying, but gets the use of the asset through financing D. The lessor can use the lease payments as collateral to borrow 8. An operating lease is cancelable because: ฀ ฀ A. The asset is easily broken or damaged B. The lessee typically is uncertain about his use needs for the asset C. The lessor may need the asset for some other purpose D. The lessee is not a good credit risk 9. Which one of the following is a valid statement about leasing in Canada? ฀ ฀ A. Less than 5% of machinery and equipment in Canada is leased B. Lessors prefer to keep equipment at the end of a lease in order to lease it again C. Lessees typically purchase the asset at the end of the lease D. Operating leases are particularly useful in the long term

10. Equipment manufacturers lease out equipment because: ฀ ฀ A. They can make more money renting out than manufacturing B. Leases provide cheap access for small business C. Laws require equipment makers to lease it D. Leasing agreements help support and expand sales 11. Short-term leases are convenient but: ฀ ฀ A. Often expensive for the lessee B. Often cheap for the lessee C. Usually involve second-rate equipment D. Are not as profitable for the lessor as longer-term ones 12. Some assets are almost impossible to lease short-term because: ฀ ฀ A. They are too expensive B. The assets are hard to transport for use C. The lessees don't want pay enough D. The assets to be leased are too susceptible to damage and abuse 13. Lease standardization helps justify leasing because: ฀ ฀ A. It makes all lessors pay the same lease payments B. It lowers costs through standardized leased asset and security evaluations C. It makes it possible for lessors to investigate lessees more thoroughly D. It helps lessees to select similar assets 14. A lessor finds a lease attractive from a tax viewpoint because he: ฀ A. Need not pay taxes on his assets so long as they are leased out B. Gets a tax deduction from his lease payment C. Can use the lease payment to lower his taxable income D. Can use the capital cost allowance tax shield from ownership

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15. Financial leasing is only justified by one of the following arguments. ฀ ฀ A. The lessor can make better use of CCA tax shields than can a lessee B. Leasing allows financial officers to more easily hide capital expenditures C. Leasing allows one to get access to an asset with no money down D. Such leases need not appear on the balance sheet as capitalized items 16. If a lease is capitalized, it has one of the following attributes ฀ ฀ A. It shows up as a liability on the lessor's financial statements B. It is debt on the right-hand side of the lessee's balance sheet, and an asset on the left C. The lease's present value shows as a liability on the lessee's balance sheet, but not an asset D. The lease becomes a capital asset for the lessor, allowing him to capitalize on its value to borrow more 17. The lessee in a financial lease bears the most of the same risks and rewards as ownership except: ฀ A. He doesn't know how large his lease payments are B. He has no tax shelter for his cash outflows C. He has no access to capital gain from an extraordinary salvage value D. He can cancel his obligations to a lessor with 30 days' notice

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18. Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards? ฀ ฀ A. There is reasonable assurance of asset title transfer at the end of the lease B. The lessee will receive all or most of the asset's economic benefits C. The lessor is guaranteed a profit on the lease equal to that of other investments D. The lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment

19. Off-balance sheet financing implies that: ฀ ฀ A. Leases would be capitalized B. Leases would not be capitalized in financial statements C. Leases would be amortized in a separate account not in the lessee's balance sheet D. Leases show up in the income statement, but not the balance sheet 20. Debt-rating agencies take financial and operating leases into account because: ฀ ฀ A. They realize that lessees need that information for their records B. The agencies are required by law to do so C. The book income of the lessee is improved by including lease obligations D. The book income will be lower, all things equal, if lease obligations show as a balance sheet item 21. If the present value of financial lease payments were $100,000, this capitalized amount would appear: ฀ A. As a liability on the lessee's balance sheet B. As income on the lessor's income statement C. As a liability and as an asset on the lessee's balance sheet D. Only on the lessor's financial records 22. Lease capitalization's value determination requires one of the following methods. ฀ A. Finding the net present value of future lease payments B. Recording the asset's purchase price as the lessee's asset C. The lessor shows the asset's effect on his leverage D. Altering the lessee's restrictive covenants by the amount of the asset's value

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23. If a machine costs $50,000, and $5,000 a year for the lessor to maintain and insure, what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease, paid in arrears, if the lessor's cost of capital is 8%? ฀ ฀ A. $15,816 B. $73,114 C. $17,155 D. $55,000 24. If the lease payment for the machine in Question 53 were made in advance, starting at the beginning of the first year of the contract, what would the size of such a payment now be as an equivalent annual cost? ฀ ฀ A. $71,455 B. $14,644 C. $15,533 D. $15,816 25. Which of the following is not a normally attractive feature of an operating lease? ฀ ฀ A. The lessee has the option to cancel B. The lessee only needs the equipment for a short time C. The lessee can't afford to buy the asset D. The lessor offers superior and cheaper maintenance than the lessee can perform 26. Which one of the following characteristics does not distinguish financial leases from operating leases? ฀ ฀ A. Financial lease analysis compares leasing to borrowing B. Financial leases are not cancelable C. Operating leases involve real physical assets D. Operating leases do not extend over the economic life of the asset 27. If a lessor paid $800,000 for an asset, how would the lessee treat this amount in his financial lease analysis? ฀ ฀ A. Lessor would ignore it, since it is a lessor cost B. Lessor would treat it as a cash inflow, since he avoids it by leasing C. Lessor would amortize it over the lease life as an expense D. Lessor would discount it by his cost of capital

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28. If the asset described in Question 57 had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%. The asset class uses declining balance. ฀ ฀ A Lessee would calculate the CCA amounts for each of the five years, apply the tax rate against these . amounts, and show these amounts as cash outflows B. Lessee would calculate the CCA amounts for the entire life of the asset, and show those amounts as cash flows C. Lessee would ignore the CCA, since it is the lessor's financial province D. Lessee would treat the CCA calculations for each of the five years of the lease as cash inflows for the lessor 29. Which one of the following is not a cash flow item in financial lease analysis? ฀ A. The lessor's repayment schedule for financing the asset B. The value of the salvage to the lessor C. The CCA tax shelters of the lessor D. The lease payment's tax shelter impacts for the lessee

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30. What would the CCA tax shields be for Years 0 and 4, assuming these tax shields start in Year 0 and end in Year 4? Remember: CCA = 30%. ฀ ฀ A. $48,000 and $27,989 B. $52,000 and $0 C. $120,000 and $69,972 D. $48,000 and $69,972 31. If the lease payments of the $800,000 asset described in Question 57 were $210,000, first payment occurring at the beginning of the first year when the lease is signed, how would the lessee treat these payments in his financial lease analysis? His tax rate is 40%. ฀ ฀ A. Lessee would treat each $210,000 payment as a cash outflow B. Lessee would deduct these $210,000 payments from his CCA C. Lessee would record net cash outflows for five years of $126,000 for leasing D. Lessee would amortize the $800,000 over five years and show these inflows 32. What is the undepreciated capital cost of Question 57's $800,000 asset after five CCA calculations of 30% declining balance, with the half-year rule? ฀ ฀ A. $0 B. $240,000 C. $163,268 D. $145,564 33. If in financial lease analysis an asset's undepreciated capital cost were $200,000 and its salvage or scrap value were zero, how would the lessor treat this situation if it were assumed the asset would be alone in its class if it were owned? The tax rate is 40%. ฀ ฀ A. Lessor would ignore this, since this is the lessor's business B. Lessor would record this as an $80,000 lost tax shield at the end of the lease life C. Lessor would record the $200,000 as a cost of leasing at the end of the lease D. Lessor would record the $200,000 as a cost the beginning of the lease 34. Following the time sequence described in Table 22.1, and using the information from Questions 57 through 63, what would the present value of cash flows be for leasing this $800,000 asset if the lessee's before tax cost of capital were 15%? Note that the asset is scrapped and alone in its pool at the time of disposition. ฀ ฀ A. ($24,555) B. $3,456 C. $2,457 D. $1,743

35. If the asset in Question 64 were exactly equal to its undepreciated capital cost instead of zero, what effect would this change have on the financial lease analysis? ฀ ฀ A. The salvage would become a benefit of leasing B. The change would have no effect on the lease analysis C. The terminal loss would disappear and that would be the only change D. The terminal loss would disappear and the salvage is now a leasing cost 36. Even with lease capitalization, the financial positions of lessors and lessees differ. Which of the following statements does not support that assertion? ฀ ฀ A. The asset choice is influenced by the method of financing B. Secured creditors are more exposed to risk in the lease than are lessees C. In the face of default, the lessor's exposure to loss is larger than the lessee's D. The lessor stands to profit from unexpectedly high salvage proceeds, while the lessee does not 37. Because salvage value is a more risky estimate than others in lease analysis, one might do one of the following: ฀ ฀ A. Ignore salvage in one's calculations B. Use a higher, risk-adjusted discount rate for salvage value estimates C. Reduce the salvage value by half to account for risk D. Arrange to sell the asset ahead of time 38. Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following nonlease characteristic: ฀ ฀ A. The term is very long B. There is a down payment C. Lease payments change in size over the lease term D. The lease allows the asset's title to pass to the lessee without significant cost at the lease's end 39. In the event of lessee bankruptcy, the lessor's legal position with the leased asset is this: ฀ A. The lessor will be first in line as a creditor to recoup the lease's balance B. The lessor can take back the leased asset, but with no salvage guarantees C. The lessor has no recourse at all D. The lessee will ordinarily pay out the remainder of his lease obligations

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40. In the event of a lessor's bankruptcy, the lessor's legal position with the leased asset is this. ฀ ฀ A. The lessor is obligated to a secured creditor for the full original value of the loan associated with the leased asset B. The lessor owes only the amount associated with the remainder of the asset's lease C. The lessee can force the lessor to provide another asset D. The lessor has no obligations to creditors, since his asset is leased 41. In financial lease analysis, there is a comparison between: ฀ ฀ A. Leasing costs, and owning costs and tax shield benefits foregone B. The differing lives of a leased and owned asset C. Various salvage scenarios D. Economic benefits of owning or leasing one asset or another 42. The appropriate discount rate for financial lease analysis is: ฀ A. The after-tax cost of equity B. The lessee's weighted average cost of capital C. The lessor's required rate of return D. The lessee's after-tax cost of secured debt

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43. As a practical matter, the lessee uses a single discount rate for lease analysis, but a more refined approach would do which of the following? ฀ ฀ A. Use a different discount rate for every line on the lease analysis' cash flows, and so reflect differing risk for each cash item B.Use a zero discount rate for the lease payment, a high rate only for the CCA tax benefits, and a middle rate for the other cash flows C. Use one discount rate for the lease tax shelter, and another for the other cash flows D. Use a low, middle, and high discount rate and pick the average result 44. If a financial lease analysis shows a NPV of $1,750 that means: ฀ A. It will cost the lessee $1,750 more to lease B. It will cost the lessee $1,750 more to own C. The lessee will have to put down $1,750 as a lease deposit D. The lessor should raise his annual lease payments by $1,750

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45. If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan, which one of the following reasons would best explain that dichotomy? ฀ ฀ A. The lessor charges a higher interest rate on the lease than normally B. The asset is unreliable, so requires a higher discount rate C. The lessee may be unsure that he can earn enough taxable income to use the tax shields in the lease analysis D. The discount rate is uncertain, so a higher one is used 46. If an equivalent loan has the same cash flows as a lease, and results in a $1,500 higher present value, one could conclude that: present value than the lease analysis indicated, this shows: ฀ ฀ A. That leasing is preferable to buying the asset, since owning costs $1,500 more B. That either is acceptable, since the cash flows are the same C. One should not lease D. That owning will require more capital up front 47. If a lease analysis shows exactly the same present value as an equivalent loan, the lessee should: ฀ A. Choose to lease or buy based on other criteria B. Lease, since there are more tax shelters C. Buy, because the salvage might be bigger than estimated D. Neither lease nor buy, since the asset choice is clearly wrong 48. If a financial lease analysis shows a positive result, which one of the following is true? ฀ A. The user should own the asset B. The lessor should own the asset C. Given the asset choice, the lease terms favour leasing D. Leasing is preferable so long as there is no salvage

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49. If a financial analysis of a lease shows a negative result of $500, a manufacturer could alter the lease terms to make leasing profitable by: ฀ ฀ A. Cutting his price to the lessor by more than $500 B. Raising the CCA rate for the lessor C. Raising salvage value by lowering the discount rate D. Raising the lease terms 50. If a leased asset has maintenance offered as an included extra, such an extra would be evaluated differently from other leasing cash flows in this way. ฀ ฀ A. Maintenance would be estimated over shorter time intervals than the lease B. Maintenance would represent an extra cost to the lessee C. Maintenance would be discounted at a higher discount rate to reflect risk, and represent a cash inflow for lessee D. Maintenance would all be paid up front

51. If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon. ฀ ฀ A. The salvage is a cost to leasing; there is no terminal loss or gain B. The salvage is a cost of owning, the terminal loss is $1,000 C. Salvage has no effect on leasing, since it belongs to the owner D. The tax shelter for the terminal gain will be $1,000 52. If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon. ฀ If the asset described above were not alone in its pool, so the pool continued after the leased asset is disposed of, the following would be true. ฀ ฀ A. The tax shelter would now be larger by $400 B. The tax shelter implications would be the same as in Question 84 C. The tax shelter from the asset disposition would be delayed until the pool is terminated D. The salvage would be a cost of leasing, minus the lost tax shelter 53. If a leased asset were scrapped from a continuing CCA pool after four years, and its UCC were $10,000 and its salvage is zero, what would the present value of this asset's tax shelter be if the appropriate aftertax borrowing rate is 9%, the CCA rate is 20%, and the tax rate is 40%? ฀ ฀ A. -$2,759 B. -$1,955 C. +$10,000 D. +$2,759 54. The most important issue that makes it possible for both a lessor and lessee to gain from a financial lease arrangement is (aside from risk): ฀ ฀ A. The lessee's better cash flow B. The lessor's purchasing power for leased assets C. The lessee's higher marginal tax rate D. The lessor's higher marginal tax rate 55. Governments "incur losses" on good leases in the sense that: ฀ ฀ A. Well-constructed leases defer taxes B. The best leases take maximum advantage of lessor-lessee tax differentials C. The government finds itself helping finance leases that fail because of lessor insolvency D. The CCA rates are lower for some assets more than others 56. If the tax rates of the lessor and lessee are the same, then the financial lease analysis that shows a $500 positive NPV will suggest that: ฀ ฀ A. The lessor is $500 better off than the lessee B. The user should lease, not buy C. The lessor should lower his lease terms D. The user should buy, not lease 57. The best situation to encourage leasing would be one in which: ฀ ฀ A. The lease payments are larger in the early part of a short...