Managerial Finance and Accounting

CHAPTER 19

LEASE FINANCING

(Difficulty: E = Easy, M = Medium, and T = Tough)

True/False

Easy:

(19.1) Types of leases Answer: a Diff: E

[i]. Many leases written today combine the features of operating and financial leases. Such leases are often called “combination leases.”

a. True

b. False

(19.1) Types of leases Answer: a Diff: E

[ii]. A sale and leaseback arrangement is a type of financial, or capital, lease.

a. True

b. False

(19.1) Operating lease Answer: a Diff: E

[iii]. Operating leases help to shift the risk of obsolescence from the user to the lessor.

a. True

b. False

(19.1) Sale and leaseback Answer: a Diff: E

[iv]. Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

a. True

b. False

(19.2) Lease payments Answer: a Diff: E

[v]. The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.

a. True

b. False

(19.3) Off-balance sheet leasing Answer: a Diff: E

[vi]. Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

a. True

b. False

(19.4) Lease financing Answer: b Diff: E

[vii]. Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.

a. True

b. False

(19.5) Leveraged lease Answer: b Diff: E

[viii]. A leveraged lease is more risky from the lessee’s standpoint than an unleveraged lease.

a. True

b. False

Medium:

(19.1) Synthetic leases Answer: b Diff: M

[ix]. A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.

a. True

b. False

(19.1)...