Question1: Heavy use of off-balance sheet lease financing will tend to
[A] Affect a firm’s cash flows but not its degree of risk.
[B] Make a firm appear more risky than it actually is because its stated debt ratio will appear higher.
[C] Make a firm appear less risky than it actually is because its stated debt ratio will appear lower.
[D] Have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
Question2: Financial Accounting Standards Board (FASB) Statement #13 needs 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 & B above.
[E] Both A & C above.
Question3: Determine which of the following statements is most correct?
[A] The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
[B] Capital, or financial, leases generally provide for maintenance service on the part of the lessor & can be refinanced at the discretion of the lessee.
[C] 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.
[D] 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.
[E] A key difference between a capital lease & 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.
Question4: Operating leases normally have terms that include
[A] Cancellation clauses
[B] All of the above
[C] Maintenance of the equipment
[D] Only partial amortization
[E] Only answers A & C above
Question5: The lease analysis should compare the cost of leasing to the;
[A] After-tax cost of debt to measure the effect of leasing on the cost of equity
[B] Average cost of all fixed charges
[C] Cost of owning using debt
[D] Cost of owning using equity
[E] Cost of owning using the weighted average cost of capital for the firm