1) Define each of the following terms:

a. Lessee; lessor

b. Operating lease; financial lease; sale-and-leaseback; combination lease; synthetic lease; SPE

c. Off-balance sheet financing; capitalizing

d. FASB Statement 13

e. Guideline lease

f. Residual value

g. Lessee's analysis; lessor's analysis

h. Net advantage to leasing (NAL)

i. Alternative minimum tax (AMT)

2) Distinguish between operating leases and financial leases. Would you be more likely to find an operating lease employed for a fleet of trucks or for a

manufacturing plant?

3) Are lessees more likely to be in higher or lower income tax brackets than lessors?

4) Commercial banks moved heavily into equipment leasing during the early 1970s, acting as lessors. One major reason for this invasion of the leasing industry was

to gain the benefits of accelerated depreciation and the investment tax credit on leased equipment. During this same period, commercial banks were investing

heavily in municipal securities, and they were also making loans to real estate investment trusts (REITs). In the mid-1970s, these REITs got into such serious

difficulty that many banks suffered large losses on their REIT loans. Explain how its investments in municipal bonds and REITs could reduce a bank's willingness to

act as a lessor.

5) One advantage of leasing voiced in the past is that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than it

otherwise could have. This raised the question of whether or not both the lease obligation and the asset involved should be capitalized and shown on the balance

sheet. Discuss the pros and cons of capitalizing leases and related assets.

6) Suppose there were no IRS restrictions on what constituted a valid lease. Explain, in a manner a legislator might understand, why some restrictions should be

imposed. Illustrate your answer with numbers.