Chapter 26 Quiz A
Student Name _________________________
Student ID ____________
A short-term lease that often requires that the lessor maintain the asset but which is cancelable by the lessee is
called a(n) _____ lease.
Which one of the following leases is NOT recorded on the balance sheet of the lessee?
The discount rate which should be used when computing the net advantage to leasing is the _____ rate.
a. lessor’s pre-tax
b. lessor’s after-tax
c. lessee’s pre-tax
d. lessee’s after-tax
Which of the following are given as reasons for leasing?
III. avoiding the restrictive covenants of secured borrowing
IV. minimizing the encumbrance of assets
a. I and III only
b. II, III, and IV only
c. I, II, and IV only
d. I, II, III, and IV
When computing the net advantage to leasing, the cash flow at time zero is equal to:
a. the cost of the asset.
b. (the cost of the asset)
the tax rate).
c. the after-tax lease payment plus the lost depreciation tax shield.
d. the amount of the annual lease payment.
Your firm is debating whether to lease or to buy an asset. The asset costs $42,000, has a 3-year life, and will
be worthless after the 3 years. Leasing the asset will cost $15,000 a year. Your firm uses straight-line
depreciation and has a tax rate of 35 percent. What is the incremental cash flow for year 2 if your firm
decides to lease rather than buy?
An asset costs $60,000, has a 3-year life, and will be worthless after the 3 years. Assume that straight-line
depreciation is used, that the cost of funds is 9 percent and that the tax rate is 35 percent. The asset can be
leased for $21,500 a year. What is the net advantage to leasing?
Bruno’s is considering either purchasing or leasing some new equipment. The equipment costs $26,000 and
has a 4-year life. At the end of the 4 years the equipment should be worth $5,000. The cost of leasing is
$7,000 a year. The firm uses straight-line depreciation, has a cost of capital of 10 percent and has a 35 percent
tax rate. What is the incremental cash flow in year 4 if the firm opts to lease rather than buy the equipment?
Jeeper’s Creepers has a cost of capital of 9 percent, a tax rate of 34 percent, and uses straight-line
depreciation. The company is considering buying some equipment for $19,000. The equipment has a 3-year
life and no salvage value. The equipment could be leased for $7,000 a year. Jeeper’s has accumulated net
operating losses so does not expect to owe any taxes for the next 5 years. What is the net advantage to