Corporate Finance: The Core Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition)
4th Edition
ISBN: 9780134409276
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 25.4, Problem 2CC
Summary Introduction
To find: The lease is less risky than borrowings, if a lease is not listed as a liability on the firm's balance sheet.
Introduction: Lease is a contract between the lessee and lessor for the use of an asset. Lessee agrees to pay a specific amount as per contract to the lessor for the use of the lessor asset.
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Operating leases are examples of off‑the‑balance‑sheet financing.
True or False?
Why should investors prefer that all significant leases be reportedon the balance sheet?
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 itotherwise could have. This raised the question of whether or not both the leaseobligation and the asset involved should be capitalized and shown on the balance sheet. Discuss the pros and cons of capitalizing leases and related assets
Chapter 25 Solutions
Corporate Finance: The Core Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition)
Ch. 25.1 - In a perfect capital market, how is the amount of...Ch. 25.1 - Prob. 2CCCh. 25.2 - Prob. 1CCCh. 25.2 - Is it possible for a lease to be treated as an...Ch. 25.3 - Why is it inappropriate to compare leasing to...Ch. 25.3 - Prob. 2CCCh. 25.3 - Prob. 3CCCh. 25.4 - Prob. 1CCCh. 25.4 - Prob. 2CCCh. 25 - Suppose an H1200 supercomputer has a cost of...
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- If a firm does not provide for accrued liabilities, what problems may thefirm face?arrow_forwardHow do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor’s point of view?arrow_forwardHow may the use of leases shift the risk of rising expenses from the lessor to the lessee?arrow_forward
- Differentiate between an operating lease, acapital (or financial) lease, and a sale andleaseback arrangement. How would the pastaccounting treatment of leases mislead investorsand what rules have been put in place to mitigatethis problem?arrow_forwardOne alleged advantage of leasing voiced in the past was that it kept liabilities off the balancesheet, thus making it possible for a firm to obtain more leverage than it otherwisecould have. This raised the question of whether the lease obligation and the asset involvedshould be capitalized and shown on the balance sheet. Discuss the pros and cons of capitalizingleases and related assets.arrow_forwardLease terms can be considered to be "significantly affected": a. when the terms are the same for affiliated firms as for independent firms. b when the terms could not reasonably be expected to occur between independent firms. c. only if the lease is an operating lease to the lessee and lessor. d. only if the lease is a direct-financing lease to the lessee and lessor.arrow_forward
- What would be the advantages and disadvantages of leasing assets instead of owning them? How would the financial statements be different in a leasing situation (for both operating leases and finance leases) for the lessee? What about the lessor (including all of the types)? What disclosures should be made by lessees and lessors related to future lease payments?arrow_forwardIf a firm is interested in the current cost of its debt obligations, then it can simply look at the contractual rate of interest due to lenders on those obligations. True Falsearrow_forwardHow does a firm's use of short-term debt as opposed to long-term debt subject the firm to a greater risk of illiquidity? Give tangible examplesarrow_forward
- Which of the following is nota reason why some companies lease rather than buy? A. Leasing may allow you to borrow with little or no down payment. B. Leasing can improve the balance sheet by reducing long-term debt. C. Leasing can lower income taxes. D. Leasing transfers the title to the lessee at the beginning of the lease.arrow_forwardOff-Balance Sheet Financing What is meant by the term “off-balance sheet financing”? When do leases provide such financing and what are the accounting and economic consequences of such activity?arrow_forwardWhat are the differences between a direct-financing and a sales-type lease for a lessor? Why would a lessor provide direct-financing to a lessee? What types of organizations provide direct-financing leases?arrow_forward
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