Practice MCQ Ch 22

1. Which of the following is/are characteristics of an operating lease?

I. The payments are enough for the lessor to recover the cost of the equipment.
II. The lessee maintains the asset.
III. The lessee has the right to cancel the contract before expiration.
A. I only
B. II only
C. III only
D. I and II only
E. II and III only

2. A longer-term, fully-amortized lease under which the lessee is responsible for insurance, taxes, and
upkeep, and which the lessee generally cannot cancel without penalty, is called a(n):
A. Open lease.
B. Straight lease.
C. Operating lease.
D. Financial lease.
E. Tax-oriented lease.

3. The term "net advantage to leasing" is defined as:

A. The NPV of the decision to lease an asset instead of buying it.
B. The after-tax cash flows received from a lessee.
C. The after-tax benefit to a lessor of an asset.
D. The incremental sales by a manufacturer based on its leasing operations.
E. The future value of the incremental cash flows received from a lessee.

4. Good reasons for leasing include all of the following EXCEPT that:
A. Taxes may be reduced by leasing.
B. Leasing transfers uncertainty about the future value of the leased asset to the lessor.
C. Leasing may encumber fewer assets than borrowing.
D. Leasing may not increase a firm's financial leverage.
E. Leasing is a source of 100% financing for an asset.
5. Your firm needs to either buy or lease $230,000 worth of vehicles. These vehicles have a life of 4 years
after which time they are worthless. The vehicles belong in CCA class 10 (a 30% class) and can be leased
at a cost of $68,000 a year for the 4 years. The corporate tax rate is 34% and the cost of debt is 10%.
What is the net advantage to leasing?
A. $4,215
B. $4,361
C. $4,435
D. $4,475
E. $5,505

6. Your firm needs to either buy or lease $230,000 worth of vehicles. These vehicles have a life of 4 years
after which time they are worthless. The vehicles belong in CCA class 10 (a 30% class) and can be leased
at a cost of $68,000 a year for the 4 years. The corporate tax rate is 34% and the cost of debt is 10%.
What is the net advantage to leasing? What is the present value of the depreciation tax shield?
A. $44,375
B. $62,114
C. $73,925
D. $96,375
E. $137,950

7. The party to a leasing arrangement that is entitled to a business expense based upon its use of an
asset is called the:
A. Lessee.
B. Transferor.
C. Lessor.
D. Manufacturer.
E. Financee.

8. The relevant discount rate to use in a lease-purchase analysis is the:

A. Pre-tax borrowing rate.
B. After-tax borrowing rate.
C. Firm's weighted average cost of capital.
D. Current risk-free rate of return.
E. Firm's pre-tax weighted average cost of capital
Answer Key

1. C
2. D
3. A
4. E
5. B
6. B
7. A
8. B