PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 25, Problem 2PS
Reasons for leasing Some of the following reasons for leasing are rational. Others are irrational or assume imperfect or inefficient capital markets. Which of the following reasons are the rational ones?
- a. The lessee’s, need for the leased asset is only temporary.
- b. Specialized lessors are better able to bear the risk of obsolescence.
- c. Leasing provides 100% financing and thus preserves capital.
- d. Leasing allows firms with low marginal tax rates to “sell”
depreciation tax shields. - e. Leasing increases earnings per share.
- f. Leasing reduces the transaction cost of obtaining external financing.
- g. Leasing avoids restrictions on capital expenditures.
- h. Leasing is attractive when interest payments exceed 30% of EBITDA and there are no interest tax shields from additional borrowing.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
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
Which of the following typically represents an advantage of leasing over purchasing an asset with an installment note? a. Lease payments often are lower than installment payments.b. Leasing generally requires less cash upfront.c. Leasing typically offers greater flexibility and lower costs in disposing of an asset.d. All of the above are advantages of leasing.
True or False:
When a company borrows money to finance the purchase of an asset to use in
its business, one of their likely goals is to earn a rate of return on that asset
which is lower than the interest rate on the loan borrowing.
Select one:
True
False
Chapter 25 Solutions
PRIN.OF CORPORATE FINANCE
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...
Knowledge Booster
Learn more about
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
- 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_forwardWhich of the following contentions concerning the static trade off theory of capital structure are true? (i) The optimal capital structure depends upon both the value of the tax shield and on the costs of financial distress. (ii) Costs of financial distress decrease as the amount of debt in the capital structure increases. (iii) The value of the tax shield increases as the amount of debt in the capital structure decreases. (iv) The cost of financial distress does not depend upon the nature of the firm's assets. O Only (i) and (iv) are true. O Only (iv) is true. O Only (i) is true. None are true. O Only (ii) and (iii) are true.arrow_forwardMany firms still use the internal rate of return rule instead of net present value. When used properly, the two rules lead to the same decision, but the internal rate of return rule has several pitfalls that can trap the unwary.Explain with reasons, THREE (3) pitfalls of using the internal rate of return rule in appraising capital investment.arrow_forward
- Question 2: State whether the following statements are true or false. 6. Hedging is an investment to reduce the risk of adverse price movements in an asset. ( ) 7. The limitation of CAPM is beta does not remain stable over time. ( ) 8. Interest on debts is an expense deducted before tax, which contributes to reducing the cost of deb. ( ) 9. When investors become more risk-averse will lead the required rate of return to increase. ( ) 10. Ahmed has a bond with a par value of OMR (1000). he sold it at OMR (1100), which means a market interest rate is equal to the coupon rate of the bond. ( )arrow_forwardWhy is the acid test ratio a more rigorous test of short-term solvency than the current ratio? A. The quick ratio eliminates prepaid expenses for the denominator.B. The quick ratio eliminates prepaid expenses for the numerator.C. The quick ratio eliminates inventories from the numerator.D. The quick ratio considers only cash and marketable investments as current assets.E. The quick ratio eliminates revenue from the numerator.arrow_forwardThere are two significant benefits of obtaining a loan over investing capital: Select one: a. banks are dependable providers of venture funding, and interest charges are tax deductible b. the money does not have to be repaid, and lenders usually take an active interest in their creditors C. no ownership of the company is given up or surrendered, and interest payments are tax deductible d. the investment does not have to be repaid, and no ownership of the company is surrendered O O O Oarrow_forward
- Financial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?arrow_forwardA company should accept for investment all positive NPV investment alternatives when which of the following conditions is true?a. The company has extremely limited resources for capital investment.b. The company has excess cash on its balance sheet.c. The company has virtually unlimited resources for capital investment.d. The company has limited resources for capital investment but is planning to issue new equity to finance additional capital investment.arrow_forwardAccording to Capital Asset Pricing theory (CAPM), in a competitive marketplace: Group of answer choices A. only systematic risk is rewarded. B. only diversifiable risk is rewarded. C. all types of risks are rewarded. D. no risk is rewarded.arrow_forward
- If 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 limits the market from becoming a fully efficient market? New information takes time to process. Obtaining new information is costly. The existence of closed end investment companies. Both a. and b. are correct. All of the above answers are correct. None of the above answers is correct.arrow_forwardWhich of the statement is FALSE in financial decision making? A. Large size of business needs a large capital B. Large firms may obtain their fixed assets on the lease. C. Large firms would need to construct their own building and assemble their own plantarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License