CONNECT 1 SEMESTER ACCESS CARD FOR CORPORATE FINANCE
11th Edition
ISBN: 9781259298738
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 21, Problem 4CQ
Leasing Comment on the following remarks:
- a. Leasing reduces risk and can reduce a firm’s cost of capital.
- b. Leasing provides 100 percent financing.
- c. If the tax advantages of leasing were eliminated, leasing would disappear.
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Students have asked these similar questions
14) Good reasons for leasing include all of the following EXCEPT that:
Leasing is a source of 100% financing for an asset.
Leasing may not increase a firm's financial leverage.
Leasing may encumber fewer assets than borrowing.
Leasing transfers uncertainty about the future value of the leased asset to the lessor.
Taxes may be reduced by leasing
Which of the following statements are incorrect regarding how much debt a company should borrow? Choose all that apply.
Question 9 options:
A
As long as the company can generate higher returns on its new projects than its borrowing interest rate, borrowing more debt will enhance the company's ROE.
B
Borrowing more debt will increase a company's distress level.
C
The bigger the company, the more it should borrow
D
Debt is considered a more expensive capital source.
27.
Which of the following is an advantage of captive leasing companies over the other players in the leasing market?
They are good at developing innovative contracts that help avoid accounting problems.
They provide leasing arrangements for a wider range of products than the parent company’s product line.
They have the point-of-sale advantage in finding leasing customers.
They have access to low-cost funds allowing them to purchase assets at lower cost.
Chapter 21 Solutions
CONNECT 1 SEMESTER ACCESS CARD FOR CORPORATE FINANCE
Ch. 21 - Leasing vs. Borrowing What are the key differences...Ch. 21 - Leasing and Taxes Taxes are an important...Ch. 21 - Leasing and IRR What arc some of the potential...Ch. 21 - Leasing Comment on the following remarks: a....Ch. 21 - Accounting for Leases Discuss the accounting...Ch. 21 - IRS Criteria Discuss the IRS criteria for...Ch. 21 - Off- Balance Sheet Financing What is meant by the...Ch. 21 - Sale and Leaseback Why might a firm choose to...Ch. 21 - Leasing Cost Explain why the aftertax borrowing...Ch. 21 - Leasing vs. Purchase Why wouldnt Azul Linhas Arcas...
Ch. 21 - Reasons to Lease Why would ILFC be willing to buy...Ch. 21 - Leasing What do you suppose happens to the plane...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Prob. 7QPCh. 21 - Prob. 8QPCh. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Use the following information to work Problems...Ch. 21 - Debt Capacity Monster Magnet Manufacturing is...Ch. 21 - Setting the Lease Price An asset costs 720,000 and...Ch. 21 - Lease or Buy Wolfson Corporation has decided to...Ch. 21 - Setting the Lease Price An asset costs 590,000 and...Ch. 21 - Automobile Lease Payments Automobiles arc often...Ch. 21 - Prob. 17QPCh. 21 - Lease or Buy High electricity costs have made...Ch. 21 - THE DECISION TO LEASE OR BUY AT WARF COMPUTERS...Ch. 21 - DECISION TO LEASE OR BUY AT WARF COMPUTERS Warf...Ch. 21 - DECISION TO LEASE OR BUY AT WARF COMPUTERS Warf...Ch. 21 - DECISION TO LEASE OR BUY AT WARF COMPUTERS Warf...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose Congress enacted new tax law changes that would: (1) permit equipment to be depreciated over a shorter period, (2) lower corporate tax rates,and (3) reinstate the investment tax credit. Discuss how each of these potential changes would affect the relative volume of leasing versus conventionaldebt in the U.S. economyarrow_forwardwhich of the following is an example of unsystematic risk? decrease income tax for all company soft tech won a new sales contract increase in inflammation rate deccrease in government bond ratearrow_forwardWhich of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.arrow_forward
- Many businesses finance their investment activities internally. Should internal financing affect the efficiency with which the interest rate performs its functions? No, investment is profitable if the expected rate of return is greater than the rate of interest regardless of the source of funds. Yes, investment is profitable if the expected rate of return is greater than the rate of interest regardless of the source of funds. O No, because internal financing relies on a different profit calculation. Yes, because firms are usually more anxious about what happens to money that they do not have to pay back.arrow_forwardIf the present value of a firm’s marginal financial distress costs are less than the present value of its marginal tax shield, the company Select one: a. has too much debt in its capital structure b. should increase the amount of debt in its capital structure c. has an optimal capital structure d. should increase the amount of equity in its capital structure e. none of the abovearrow_forwardWhich of the following statements is CORRECT? Group of answer choices Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt. Higher flotation costs tend to reduce the cost of equity capital.arrow_forward
- (a) – Explain the concept of Tax Deduction in WACC. Does this tax deduction make debt finance Cheaper Then Equity Finance? (b) – Compare Dividend Valuation Model with Capital Asset Pricing Model in the context of calculating cost of equity? Can use of these two methods result in differing values of business?arrow_forwardExplain Why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress. Leveraged beta represents fundamental operational risk.arrow_forwardWhy do companies often prefer debt financing to other forms of financing for capitalinvestments?a. Actually, they don't prefer debt financing. They usually try to use retainedearnings for capital investments.b. Because bond holders are happy to just break even on their bonds.c. Because the MARR all but guarantees the projects will return yields greater thanthe interest on the loans.d. Because debt interest is tax deductible, reducing significantly the actual cost ofborrowing money for projects.arrow_forward
- Which of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.arrow_forwardAn analyst at a company notes that its cost of debt is far below that of equity. He concludes that it is important for the firm to maintain the ability to increase its borrowing because if it cannot borrow, it will be forced to use more expensive equity to finance some projects. This might lead it to reject some projects that would have seemed attractive if evaluated at the lower cost of debt. How do you balance the amount of equity and debt? Explain the significance of maintaining the ability to increase borrowing capacity for a company with a lower cost of debt compared to equity. How does this impact project evaluation and investment decisions, and what role does the concept of cost of capital play in such considerations?arrow_forwardIndicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.) b) Under the conditions of perfect capital markets, the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. (Explain your reasoning.) c) The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.)arrow_forward
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