chap21_quest

chap21_quest - CHAPTER 21 LEASING Answers to Concepts...

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CHAPTER 21 LEASING Answers to Concepts Review and Critical Thinking Questions 1. Some key differences are: (1) Lease payments are fully tax-deductible, but only the interest portion of the loan is; (2) The lessee does not own the asset and cannot depreciate it for tax purposes; (3) In the event of a default, the lessor cannot force bankruptcy; and (4) The lessee does not obtain title to the asset at the end of the lease (absent some additional arrangement). 2. The less profitable one because leasing provides, among other things, a mechanism for transferring tax benefits from entities that value them less to entities that value them more. 3. Potential problems include: (1) Care must be taken in interpreting the IRR (a high or low IRR is preferred depending on the setup of the analysis); and (2) Care must be taken to ensure the IRR under examination is not the implicit interest rate just based on the lease payments. 4. a. Leasing is a form of secured borrowing. It reduces a firm’s cost of capital only if it is cheaper than other forms of secured borrowing. The reduction of uncertainty is not particularly relevant; what matters is the NAL. b.
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This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Spring '09 term at UMBC.

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chap21_quest - CHAPTER 21 LEASING Answers to Concepts...

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