PRINCIPLES OF CORPORATE FINANCE EBK COD
13th Edition
ISBN: 9781260918250
Author: BREALEY
Publisher: INTER MCG
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Chapter 25, Problem 12PS
Valuing Financial Leases Look again at the National Waferonics lease in Problem 11. Suppose that National Waferonics is highly levered and is unable to deduct further interest payments for tax.
- a. Does this make a lease more or less attractive?
- b. Recalculate the
NPV of the lease by constructing an equivalent loan. (Hint: Start with the final year. The final repayment of the loan with interest should be set equal to the cash flow on the lease.)
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Students have asked these similar questions
Which of the following statements are true?
I. Financial leasing can still provide off-balance sheet financing.
II. The cost of capital for a financial lease is the interest rate the company
would pay on a bank loan.
III. An equivalent loan's principal plus after-tax interest payments exactly
match the after-tax cash flows of the lease.
IV. It makes sense for firms that pay no taxes to lease from firms that do.
Select one:
O a. II, III and IV only
O b. I. Il and II.
O. Il and IIl only
O d. I, II, II, and IV
When is it appropriate for the lessee to use the lessor's implicit rate to calculate the present value of the lease payments?
A.when the lessee's incremental borrowing rate is lower than the lessor's rate
B.whenever the lessee knows what the lessor's rate is
C.when the lessor's implicit rate is lower than the lessee's incremental borrowing rate
D.when the lessor's rate is higher than the lessee's incremental borrowing rate
Which of the following is/are good reason(s) for leasing?
I. Taxes may be cancelled by leasing
II. Leasing may increase certain types of certainty that might increase the value of the firm.
III. Transaction costs will cease to exist for a lease contract than for buying the asset
IV. Leasing facilitates the management of the firm's cash flows.
V. Leasing provides 100 percent financing whereas loans require an initial down payment.
Select one:
a.
I and III only
b.
IV only
c.
III only
d.
I and IV only
e.
I, III, and IV only
Chapter 25 Solutions
PRINCIPLES OF CORPORATE FINANCE EBK COD
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Inflation and operating leases In Problem 7, we...Ch. 25 - Technological change and operating leases Look at...Ch. 25 - Valuing financial leases Look again at Problem 7....Ch. 25 - Valuing Financial Leases Look again at the...
Ch. 25 - Valuing financial leases Look again at the bus...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Valuing financial leases Nodhead College needs a...Ch. 25 - Valuing financial leases The Safety Razor Company...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 23PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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- Which of the following statements is FALSE? TO OXO OXO 0:00:00 T ODOXOOX 1600 Select one: O a. In a perfect market, the cost of leasing and then purchasing the asset is higher than the cost of borrowing to purchase the asset. O b. Because we are getting the entire asset when we purchase it with the loan, the loan payments usually are higher than the lease payments. O c. The amount of the lease payment will depend on the purchase price, the residual value, and the appropriate discount rate for the cash flows. O d. With a standard loan we are financing the entire cost of the asset; with a lease we are financing only the cost of the economic depreciation of the asset during its life.arrow_forward32. In computing the present value of the lease payments, the lessee should use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. use its incremental borrowing rate in all cases. use the implicit rate in all cases.arrow_forwardWhich of the following is/are good reason(s) for leasing? I. Taxes may be cancelled by leasing II. Leasing may increase certain types of certainty that might increase the value of the firm. II. buying the asset Transaction costs will cease to exist for a lease contract than for IV. Leasing facilitates the management of the firm's cash flows. V. Leasing provides 100 percent financing whereas loans require an initial down payment. Select one: O a. IV only O b. I and IV only Oc. I and II only O d. II only O e. I, II, and IV onlyarrow_forward
- 42.. new recheck A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts? The sales price less the present value of the residual value. The lease payments plus the unguaranteed residual value. The present value of the lease payments plus the present value of the unguaranteed residual value. The cost of the asset to the lessor, less the present value of any unguaranteed residual value.arrow_forwardWhat types of risk does the BORROWER (or OWNER) face when taking a commercial real estate loan? What is the potential benefit? What is meant by positive financial leverage? What about negative financial leverage? What drives the spread between 10-year commercial mortgage rates and the 10-year Treasury yield seen in Exhibit 16-2?arrow_forwardWhich of the following statements regarding the new accounting rules, which take effect in 2019, for leases is false? If the lease term is one year or longer, a liability must be recognized. If the lease term is less than one year, an asset must be recognized. The new lease accounting rules will result in more assets and liabilities being recognized on the balance sheet. Leasing will likely remain popular under the new lease accounting rules because leases do not require a large initial outlay of cash.arrow_forward
- What rate is most likely used when computing the present value of the new lease liability arising from modification of terms? new implicit rate new incremental borrowing rate old incremental borrowing rate old implicit interest ratearrow_forwardSuppose the gold price is $300/oz., the 1-year forward price is 310.686, and the continuously compounded risk-free rate is 5%. a. What is the lease rate? b. Demonstrate a cash-and-carry strategy that provides the zero cash flow at time 0 and the maturity date. (You borrow to buy gold, sell the gold forward, and lend the gold, earning the lease rate.) c. What is the return on a cash-and-carry strategy in which gold is not loaned? (You borrow to buy gold and sell the gold forward.)arrow_forwardAssuming that FASB Statement 13 and ASU2016-02 are working as they are supposed to work,should traditional leasing arrangements enable afirm to use more financial leverage than it otherwise could? How did synthetic leases alter the situation? How do FASB Statement 13, ASU 2016-02and synthetic leases affect the rate at which cashflows are discounted in a lease analysis?arrow_forward
- Now assume that Millon believes the computer’s residual value could be as low as $0 or as high as $250,000, but she stands by $125,000 as her expected value. She concludes that the residual value is riskier than the other cash flows in the analysis, and she wants to incorporate this differential risk into her analysis. Describe how this can be accomplished. What effect will it have on the lease decision?arrow_forwardLease versus Buy Consider the data in Problem 19-1. Assume that RCs tax rate is 40% and that the equipments depreciation would be 100 per year. If the company leased the asset on a 2-year lease, the payment would be 110 at the beginning of each year. If RC borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should RC lease or buy the equipment?arrow_forwardWhich of the statements is most correct? Select one: a. Some years ago leasing was called "off balance sheet financing" because the leased asset and the corresponding lease obligation did not appear directly on the balance sheet. Today, though, the situation has changed materially because all types of lease must be capitalized and reported on the balance sheet, along with the value of the leased asset. O b. In a lease-versus-purchase analysis, cash flows should generally be discounted at the WACC. O . Each of the statements is true. O d. Each of the statements is false.arrow_forward
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