Directions: Answer the following five questions on a separate document. Explain how you reached the
answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using
the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points
for this homework assignment.
1. Operating leases often have terms that include
a. full amortization over the life of the lease.
b. very high penalties if the lease is canceled.
c. restrictions on how much the leased property can be used.
d. much longer lease periods than for most financial leases.
e. maintenance of the equipment by the lessor.
2. Which of the following statements is most CORRECT?
a. Capitalizing a lease means that the firm issues equity capital in proportion to its current
capital structure, in an amount sufficient to support the lease payment obligation.
b. The fixed charges associated with a lease can be as high as, but never greater than, the
fixed payments associated with a loan.
c. Capital, or financial, leases generally provide for maintenance by the lessor.
d. A key difference between a capital lease and an operating lease is that with a capital
lease, the lease payments provide the lessor with a return of the funds invested in the
asset plus a return on the invested funds, whereas with an operating lease the lessor
depends on the residual value to realize a full return of and on the investment.
e. Firms that use “off balance sheet” financing, such as leasing, would show lower debt
ratios if the effects of their leases were reflected in their financial statements.
3. Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified
audit report, financial (or capital) leases must be included in the balance sheet by reporting the
a. residual value as a liability.
b. present value of future lease payments as an asset and also showing this same amount
as an offsetting liability.
c. undiscounted sum of future lease payments as an asset and as an offsetting liability.
d. undiscounted sum of future lease payments, less the residual value, as an asset and as
an offsetting liability.
e. residual value as a fixed asset.
4. Heavy use of off-balance sheet lease financing will tend to
a. make a company appear less risky than it actually is because its stated debt ratio will
b. affect a company’s cash flows but not its degree of risk.
c. have no effect on either cash flows or risk because the cash flows are already reflected in
the income statement.
d. affect the lessee’s cash flows but only due to tax effects.
e. make a company appear more risky than it actually is because its stated debt ratio will be
FIN 540 – Homework Chapter 19
FIN 540 Homework Chapter 19
Page 2 of 2
5. In the lease versus buy decision, leasing is often preferable
a. because, generally, no down payment is required, and there are no indirect interest
b. because lease obligations do not affect the firm’s risk as seen by investors.
c. because the lessee owns the property at the end of the least term.
d. because the lessee may have greater flexibility in abandoning the project in which the
leased property is used than if the lessee bought and owned the asset.
e. because it has no effect on the firm’s ability to borrow to make other investments.
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