PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
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 solutionStudents have asked these similar questions
14) Good reasons for leasing include all of the following EXCEPT that:
Leasing is a source of 100% financing for an asset.
Leasing may not increase a firm's financial leverage.
Leasing may encumber fewer assets than borrowing.
Leasing transfers uncertainty about the future value of the leased asset to the lessor.
Taxes may be reduced by leasing
27.
Which of the following is an advantage of captive leasing companies over the other players in the leasing market?
They are good at developing innovative contracts that help avoid accounting problems.
They provide leasing arrangements for a wider range of products than the parent company’s product line.
They have the point-of-sale advantage in finding leasing customers.
They have access to low-cost funds allowing them to purchase assets at lower cost.
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
- Securitization has its upside (primarily liquidity and diversification), but it has its downside as well. Which of the following are potential downsides to securitization? Choose the best answer. Select one: Tax-avoidance and regulatory-avoidance Non-transparency Agency costs All of the abovearrow_forwardMany 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_forward
- Which statement is true? Financing the property may not be beneficial to the owner in terms of yield on the equity investment O If the overall property yield equals the mortgage rate, the owner receives an additional yield on her or his investment by trading on the equity O If the overall yield on the property is less than the mortgage rate, favorable leverage occurs O When negative leverage occurs, the owner receives a cash yield on the property that is greater than if the property were not financedarrow_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_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_forward
- There 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_forwardFinancial 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_forwardIf 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_forward
- A 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_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_forwardThe Nobel Prize-winning Modigliani & Miller Theory states that a firm’s capital structure does not matter. It is based on three key assumptions: No income taxes Equal borrowing cost- individuals can borrow at the same interest rate as corporations. Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs. Are these assumptions reasonable? What are the implications if the assumptions do not hold?arrow_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 LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage LearningEBK 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