Question 1

Term loans are frequently retired by annual dividend payments.​

Accepted Answer

Term loans are usually repaid through a series of regular payments (installments) over the loan term, rather than just one annual dividend payment.

Question 2

The firm will prefer debt to leasing since interest is a tax deductible expense while lease payments are not tax deductible.​

Accepted Answer

Both interest on debt and lease payments are generally tax deductible for the firm, making this statement incorrect.

Question 3

Both lease payments and depreciation are tax deductible expenses for the lessee.​

Accepted Answer

Lease payments are tax deductible for the lessee, but depreciation is not, because depreciation is applicable to assets owned by the business, not leased.

Question 4

Blanket inventory loans are illustrations of unsecured short‑term credit.​

Accepted Answer

Blanket inventory loans are secured short-term credit, not unsecured.

Question 5

If a lease is capitalized, the liability is carried on the lessor's balance sheet.​

Accepted Answer

If a lease is capitalized, the liability is carried on the lessee's balance sheet, not the lessor's.

Question 6

Term loans are​
A) ​usually for twenty years
B) ​generally lack collateral (i.e., unsecured)
C) ​made by insurance companies
D) ​short term obligations

Accepted Answer

Term loans are often made by insurance companies as they seek long-term investments.

Question 7

Operating leases are examples of off‑the‑balance‑sheet financing.​

Accepted Answer

Operating leases are considered off-the-balance-sheet financing because the lease obligations do not appear as liabilities on the lessee's balance sheet. Instead, lease payments are expensed as operating expenses on the income statement. This allows a company to use assets without showing the liabilities associated with their use.

Question 8

A prime reason for leasing is to receive the depreciation associated with the asset.​

Accepted Answer

Leasing does not allow the lessee to claim depreciation on the asset; instead, the lessor, who retains ownership of the asset, claims the depreciation benefits.

Question 9

The lessor depreciates the equipment while the lessee deducts the cost of the lease.​

Accepted Answer

The lessor depreciates the equipment as they are the owner of the equipment, while the lessee deducts the cost of the lease payments as they are the one using the equipment.

Question 10

All term loans are supported by collateral.​

Accepted Answer

Not all term loans require collateral. Some term loans, especially unsecured ones, are granted based on the borrower's creditworthiness without requiring specific assets as security.

Question 11

Term notes sold to the general public​
A) are usually for twenty years​
B) ​generally have collateral (i.e., are secured)
C) ​are generally non-callable
D) ​have variable interest rates

Accepted Answer

Term notes sold to the general public are generally non-callable, meaning the issuer cannot redeem or "call" the note prior to maturity. The other options given are not necessarily true of all term notes sold to the general public.

Question 12

If a lease is capitalized, the present value of the lease payments is put on the firm's balance sheet as a liability.​

Accepted Answer

When a lease is capitalized, the present value of the lease payments is treated as a liability and recorded on the balance sheet.

Question 13

If a firm has a need for finance, it may sell an asset and lease it back.​

Accepted Answer

Selling an asset and leasing it back is a common form of asset-based financing, also known as sale-leaseback. This allows the firm to free up cash from the sale of the asset while retaining its use through the lease agreement.

Question 14

The residual value (i.e., salvage value) reduces a lease's cash inflows.

Accepted Answer

The residual value, or salvage value, does not affect a lease's cash inflows; instead, it reduces the depreciable base of the asset, affecting the depreciation expense over the lease term.

Question 15

The larger an asset's salvage value (i.e., its residual value), the stronger the argument to own instead of leasing.​

Accepted Answer

This statement is true because a higher salvage value means that the asset will retain more value over time, making it more valuable to own rather than lease. This is because a leased asset will ultimately be returned to the lessor at the end of the lease term, with no residual value to the lessee. However, if the asset is owned, the owner can sell it at the end of its useful life and recoup some of the initial cost.

Question 16

An operating lease generally does not have a maintenance contract.​

Accepted Answer

An operating lease often includes a maintenance contract, where the lessor is responsible for the asset's maintenance, unlike a finance lease where the lessee typically assumes maintenance responsibilities.

Question 17

The lessor owns the asset while the lessee has the use of the asset.​

Accepted Answer

This is the basic concept of a lease agreement where the lessor retains ownership of the asset and allows the lessee to use it for a specific period of time in exchange for payment.

Question 18

Intermediate term notes sold to the general public are usually secured by collateral.​

Accepted Answer

Intermediate term notes sold to the general public may be secured or unsecured, depending on the issuer's creditworthiness and market demand. However, if collateral is provided, it may enhance the creditworthiness of the note and reduce the interest rate charged to investors.

Question 19

The use of leasing does not increase the firm's use of financial leverage.​

Accepted Answer

Leasing is a form of financial leverage because it allows a firm to use assets without buying them outright, effectively increasing the firm's debt obligations and thus its financial leverage.

Question 20

If a firm sells equipment and subsequently leases it back, that is illustrative of a leveraged lease.​

Accepted Answer

A sale and leaseback transaction is different from a leveraged lease. In a sale and leaseback, a company sells an asset and leases it back for a long period, whereas a leveraged lease typically involves a lessor, a lessee, and a lender, with the lessor using borrowed funds to purchase the asset being leased.

Quiz 27: Intermediate-Term Debt and Leasing

Term loans are frequently retired by annual dividend payments.​

The firm will prefer debt to leasing since interest is a tax deductible expense while lease payments are not tax deductible.​

Both lease payments and depreciation are tax deductible expenses for the lessee.​

Blanket inventory loans are illustrations of unsecured short‑term credit.​

If a lease is capitalized, the liability is carried on the lessor's balance sheet.​

Term loans are​

Operating leases are examples of off‑the‑balance‑sheet financing.​

A prime reason for leasing is to receive the depreciation associated with the asset.​

The lessor depreciates the equipment while the lessee deducts the cost of the lease.​

All term loans are supported by collateral.​

Term notes sold to the general public​

If a lease is capitalized, the present value of the lease payments is put on the firm's balance sheet as a liability.​

If a firm has a need for finance, it may sell an asset and lease it back.​

The residual value (i.e., salvage value) reduces a lease's cash inflows.

The larger an asset's salvage value (i.e., its residual value), the stronger the argument to own instead of leasing.​

An operating lease generally does not have a maintenance contract.​

The lessor owns the asset while the lessee has the use of the asset.​

Intermediate term notes sold to the general public are usually secured by collateral.​

The use of leasing does not increase the firm's use of financial leverage.​

If a firm sells equipment and subsequently leases it back, that is illustrative of a leveraged lease.​

Term loans are frequently retired by annual dividend payments.

The firm will prefer debt to leasing since interest is a tax deductible expense while lease payments are not tax deductible.

Both lease payments and depreciation are tax deductible expenses for the lessee.

Blanket inventory loans are illustrations of unsecured short‑term credit.

If a lease is capitalized, the liability is carried on the lessor's balance sheet.

Term loans are

Operating leases are examples of off‑the‑balance‑sheet financing.

A prime reason for leasing is to receive the depreciation associated with the asset.

The lessor depreciates the equipment while the lessee deducts the cost of the lease.

All term loans are supported by collateral.

Term notes sold to the general public

If a lease is capitalized, the present value of the lease payments is put on the firm's balance sheet as a liability.

If a firm has a need for finance, it may sell an asset and lease it back.

The larger an asset's salvage value (i.e., its residual value), the stronger the argument to own instead of leasing.

An operating lease generally does not have a maintenance contract.

The lessor owns the asset while the lessee has the use of the asset.

Intermediate term notes sold to the general public are usually secured by collateral.

The use of leasing does not increase the firm's use of financial leverage.

If a firm sells equipment and subsequently leases it back, that is illustrative of a leveraged lease.