MULTIPLE CHOICE QUESTIONS: (CHOOSE 1 ANSWER PER QUESTION)

If a leased asset were scrapped from a continuing CCA pool after four years, and its UCC were $10,000 and its salvage is zero, what would the present value of this asset's tax shelter be if the appropriate after-tax borrowing rate is 9%, the CCA rate is 20%, and the tax rate is 40%?

Multiple Choice

• -$2,759

• -$1,955

• +$10,000

• +$2,759

If a financial analysis of a lease shows a negative result of $500, a manufacturer could alter the lease terms to make leasing profitable by:

Multiple Choice

• cutting his price to the lessor by more than $500.

• raising the CCA rate for the lessor.

• raising salvage value by lowering the discount rate.

• raising the lease terms

Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following non-lease characteristic:

Multiple Choice

• the term is very long.

• there is a down payment.

• lease payments change in size over the lease term.

• the lease allows the asset's title to pass to the lessee without significant cost at the lease's end

Which one of the following is not a cash flow item in financial lease analysis?

Multiple Choice

• the lessor's repayment schedule for financing the asset.

• the value of the salvage to the lessor.

• the CCA tax shelters of the lessor.

• the lease payment's tax shelter impacts for the lessee

Lease capitalization's value determination requires one of the following methods.

Multiple Choice

• finding the net present value of future lease payments.

• recording the asset's purchase price as the lessee's asset.

• the lessor shows the asset's effect on his leverage.

• altering the lessee's restrictive covenants by the amount of the asset's value

All of the following must be included on a company's balance sheet except:

Multiple Choice

• capital leases.

• sale and leaseback agreements.

• operating leases.

• leveraged leases.

Which of the following is not a normally attractive feature of an operating lease?

Multiple Choice

• the lessee has the option to cancel.

• the lessee only needs the equipment for a short time.

• the lessee can't afford to buy the asset.

• the lessor offers superior and cheaper maintenance than the lessee can perform.

As a practical matter, the lessee uses a single discount rate for lease analysis, but a more refined approach would do which of the following?

Multiple Choice

• use a different discount rate for every line on the lease analysis' cash flows, and so reflect differing risk for each cash item.

• use a zero discount rate for the lease payment, a high rate only for the CCA tax benefits, and a middle rate for the other cash flows.

• use one discount rate for the lease tax shelter, and another for the other cash flows.

• use a low, middle, and high discount rate and pick the average result

If the asset described in above Question had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%. The asset class uses declining balance.

Multiple Choice

• lessee would calculate the CCA amounts for each of the five years, apply the tax rate against these amounts, and show these amounts as cash outflows.

• lessee would calculate the CCA amounts for the entire life of the asset, and show those amounts as cash flows.

• lessee would ignore the CCA, since it is the lessor's financial province.

• lessee would treat the CCA calculations for each of the five years of the lease as cash inflows for the lessor.

If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon.

Multiple Choice

• the salvage is a cost to leasing; there is no terminal loss or gain.

• the salvage is a cost of owning, the terminal loss is $1,000.

• salvage has no effect on leasing, since it belongs to the owner.

• the tax shelter for the terminal gain will be $1,000.