978-0133507676 Chapter 24 Part 3

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7) Should St. Martin lease the scanner or borrow the funds and buy the scanner?

A) Buy the scanner; the NPV of the decision = $74,890.28.

B) Buy the scanner; the NPV of the decision = $1,749,890.28

C) Lease the scanner; the NPV of the decision = $1,812,027.19

D) Lease the scanner; the NPV of the decision = $692,559.51

AACSB Objective: Analytic Skills

Author: JP

Question Status: Previous Edition

8) In the chapter, the lease versus buy decision was called an unfair comparison. Why?

What is the correct comparison?

AACSB Objective: Relective Thinking Skills

Author: JP

Question Status: Previous Edition

Use the information for the question(s) below.

St. Martin’s Hospital plans to purchase or lease a $2 million CT scanner. If purchased, the

CT scanner will be depreciated on a straight-line basis over ive years, after which it will be

worthless. If leased, the annual lease payments will be $500,000 per year for ive years. St.

Martin’s borrowing cost is 8%, and its tax rate is 35%.

9) If St. Martin purchases the CT scanner, what is the amount of the lease-equivalent loan?

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

10) Is St. Martin’s better of leasing the CT scanner or inancing the purchase of the CT

scanner with a lease-equivalent loan and by how much is St Martin’s better of?

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

24.4 Reasons for Leasing

1) Which of the following statements is FALSE?

A) For a lease to be attractive to both the lessee and the lessor, the gains must come from

some underlying economic beneits that the leasing arrangement provides.

B) With a true tax lease, the lessor replaces depreciation and interest tax deductions with a

deduction for the lease payments.

C) Generally speaking, if the asset’s tax depreciation deductions are more rapid than its

lease payments, a true tax lease is advantageous if the lessor is in a higher tax bracket than

the lessee.

D) A tax gain occurs if the lease shifts the more valuable deductions to the party with the

higher tax rate.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

2) Which of the following is a valid argument for leasing?

A) tax diferences

B) reduced resale costs

C) eiciency gains from specialization

D) All of the above are valid arguments for leasing.

AACSB Objective: Analytic Skills

Author: JP

Question Status: Previous Edition

3) Which of the following explains why reducing leverage through of-balance sheet

inancing is not a valid argument for leasing?

A) Whether they appear on the balance sheet or not, lease commitments are liabilities for

the irm.

B) For most large corporations, the amount of leverage the irm can obtain through a lease

is unlikely to exceed the amount of leverage the irm can obtain through a loan.

C) Some companies may place limits on the dollar amounts a manager can invest over a

certain period.

D) All of the above are reasons why reducing leverage through of-balance sheet inancing

is not a valid argument for leasing.

AACSB Objective: Relective Thinking Skills

Author: JP

Question Status: Previous Edition

4) Which of the following statements is FALSE?

A) If a irm only needs to use the asset for a short time, it is probably less costly to lease it

than to buy and resell the asset.

B) While owners of assets are likely to resell them only if the assets are “lemons,” a short-

term lease can commit the user of an asset to return it regardless of its quality. In this way

leases can help mitigate the adverse selection problem in the used goods market.

C) Car dealerships are in a better position to sell a used car at the end of a lease than a

consumer is.

D) If the asset’s tax depreciation deductions are faster than its lease payments, there are

tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee.

AACSB Objective: Relective Thinking Skills

Author: JN

Question Status: Previous Edition

5) Which of the following statements is FALSE?

A) By ofering assets together with complementary services, lessors can achieve eiciency

gains and ofer attractive lease rates.

B) Assets leased under a true lease are aforded bankruptcy protection and cannot be

seized in the event of default.

C) Because of the higher recovery value in the event of default, a lessor may be able to

ofer more attractive inancing through the lease than an ordinary lender could.

D) Lessors often have eiciency advantages over lessees in maintaining or operating

certain types of assets.

AACSB Objective: Relective Thinking Skills

Author: JN

Question Status: Previous Edition

6) Which of the following statements is FALSE?

A) Most inancial analysts and sophisticated investors consider operating leases (which

must be listed in the footnotes of the inancial statements) to be additional sources of

leverage.

B) By carefully avoiding the four criteria that deine an operating lease for accounting

purposes, a irm can avoid listing the long-term lease as a liability.

C) Because a lease is equivalent to a loan, the irm can increase its actual leverage without

increasing the debt-to-equity ratio on its balance sheet.

D) For most large corporations, the amount of leverage the irm can obtain through a lease

is unlikely to exceed the amount of leverage the irm can obtain through a loan.

AACSB Objective: Relective Thinking Skills

Author: JN

Question Status: Previous Edition

7) Which of the following statements is FALSE?

A) Leasing allows the party best able to bear the risk to hold it. For example, small irms

with a low tolerance for risk may prefer to lease rather than purchase assets.

B) When the lessor is the manufacturer, a lease in which the lessor bears the risk of the

residual value can improve incentives and lower agency costs.

C) For leases in which the lessor retains a substantial interest in the asset’s residual value,

the lessee has more of an incentive to take proper care of an asset that is leased rather

than purchased.

D) Whether they appear on the balance sheet or not, lease commitments are a liability for

the irm.

AACSB Objective: Relective Thinking Skills

Author: JN

Question Status: Previous Edition