Questions based on operating and finance leases

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Reference no: EM1315589

Multiple choice questions on Operating and Finance leases.

1.  Operating leases usually have terms that include

a.         Maintenance of the equipment.

b.        Only partial amortization.

c.         Cancellation clauses.

d.        All of the above.

e.         Only answers a and c above.

2.   Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the

a.         Value of the leased asset as a fixed asset.

b.        Present value of future lease pay­ments as an asset.

c.         Present value of future lease pay­ments as a liability.

d.        Both a and b above.

e.         Both a and c above.

3.  Which of the following statements is most correct?

a.         Firms which use "off balance sheet" financing, such as leasing, will show lower debt ratios once the effects of their leases are 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 service on the part of the lessor and can be refinanced at the discretion of the lessee.

e.         A key difference between a capital lease and an operating lease is that with a capital lease, the total lease payments on the asset are roughly equal to the full price of the asset plus a return on the investment in the asset.

4.  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 appear higher.

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.

5.   The lease analysis should compare the cost of leasing to the

a.         Cost of owning using debt.

b.        Cost of owning using equity.

c.         After-tax cost of debt to measure the effect of leasing on the cost of equity.

d.        Average cost of all fixed charges.

e.         Cost of owning using the weighted average cost of capital for the firm.

6.  Stanley Corporation is considering a five-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10 percent and is amortized over five years with end-of-year payments. Stanley can also lease the equipment for an end-of-year payment of $1,790,000. What is the difference in the actual out-of-pocket cash flows between the two payments, that is, by how much (in thousands of dollars)does one payment exceed the other?

a.         $ 90.0

b.        $125.5

c.         $207.2

d.        $251.0

e.         $316.8

Reference no: EM1315589

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