IFM10 Ch 19 Test Bank - CHAPTER 19 LEASE FINANCING...

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CHAPTER 19 LEASE FINANCING (Difficulty: E = Easy, M = Medium, and T = Tough) True/False Easy: (19.1) Types of leases Answer: a Diff: E 1 . 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 2 . 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 3 . 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 4 . 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 5 . 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 Chapter 19: Lease Financing Page 1
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(19.3) Off-balance sheet leasing Answer: a Diff: E 6 . 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 7 . 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 8 . 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 9 . 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) Synthetic leases Answer: a Diff: M 10 . In a synthetic lease a special purpose entity (SPE) is set up by a corporation that wants to acquire the use of an asset. The SPE borrows up to 97% of its capital, uses its funds to buy the asset, and then leases it to the sponsoring corporation on a short-term basis. This keeps both the asset and the debt off the sponsoring company’s books. a. True b. False (19.6) Residual value and lease rates Answer: b Diff: M 11 . If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value. a. True b. False Page 2 Chapter 19: Lease Financing
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(19.6) Residual value and lease rates Answer: b Diff: M 12 . Assume that a piece of leased equipment has a relatively high rather than low expected residual value. From the lessee's viewpoint, it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate. a. True
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IFM10 Ch 19 Test Bank - CHAPTER 19 LEASE FINANCING...

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