Fin540 Chapter 19

FIN 540 – Homework Chapter 18

Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 20 points for this homework assignment. 1. Which of the following statements is most CORRECT? a. Firms that use "off balance sheet" financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements. b. Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation. c. The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan. d. Capital, or financial, leases generally provide for maintenance by the lessor. e. A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment. 2. Heavy use of off-balance sheet lease financing will tend to a. make a company appear more risky than it actually is because its stated debt ratio will be increased. b. make a company appear less risky than it actually is because its stated debt ratio will appear lower. c. affect a company's cash flows but not its degree of risk. d. have no effect on either cash flows or risk because the cash flows are already reflected in the income statement. e. affect the lessee’s cash flows but only due to tax effects. 3. A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased a. b. c. d. is...