Seminar In Financial Management Test #2

Front 1

T/F A reverse split reduces the number of shares outstanding.

Back 1

True

Front 2

T/F In theory, dividends are determined as a residual item.
Therefore, the better the firm's investment opportunities,
the lower its dividend payments should be.

Back 2

True

Front 3

T/F A stock dividend and a stock split should, at least
conceptually, have the same effect on shareholder's wealth.

Back 3

True

Front 4

T/F Underlying the dividend irrelevance theory proposed by
Miller and Modigliani is their argument that the value of
the firm is determined only by its basic earning power and
its business risk.

Back 4

True

Front 5

T/F One implication of the bird-in-the-hand theory of
dividends is that a reduction in dividend yield must be
offset by a more than proportionate increase in growth in
order to keep a firm's required return constant, other
things held constant.

Back 5

False

Front 6

T/F If the information content, or signaling, hypothesis is
correct, then changes in dividend policy can be important
with respect to firm value and capital costs.

Back 6

True

Front 7

T/F The optimal dividend policy for a firm strikes a balance
between payment of current dividends and retention of earnings
for future growth, and results in the maximization of stock
price.

Back 7

True

Front 8

T/F The dividend irrelevance theory, proposed by Miller and
Modigliani, says that as long as a firm pays a dividend, how
much it pays does not affect either its cost of capital or its
stock price.

Back 8

False

Front 9

T/F MM's dividend irrelevance theory says that dividend policy
does not affect a firm's value but can affect its cost of
capital.

Back 9

False

Front 10

T/F If investors do, in fact, prefer that firms retain most of
their earnings, then firms that want to maximize stock price
should hold dividend payments to low levels.

Back 10

True

Front 11

T/F The announcement of an increase in the cash dividend always
causes an increase in the price of the firm's common stock.

Back 11

False

Front 12

T/F If a firm adopts a residual dividend policy, dividends are
determined as a residual item. Therefore, the better the
firm's investment opportunities, the lower its dividend
payments should be.

Back 12

True

Front 13

T/F A stock dividend and a stock split should, at least
conceptually, have the same effect on shareholders’ wealth.

Back 13

True

Front 14

T/F If the information content, or signaling, hypothesis is
correct, then changes in dividend policy can be important with
respect to firm value and capital costs.

Back 14

True

Front 15

T/F A stock split will reduce the number of shares outstanding.

Back 15

False

Front 16

T/F Underlying the dividend irrelevance theory proposed by
Miller and Modigliani is their argument that the value of the
firm is determined only by its basic earning power and its
business risk.

Back 16

True

Front 17

T/F A firm that follows a residual dividend policy must
believe that the dividend irrelevance theory is correct.

Back 17

True

Front 18

T/F One implication of the bird-in-the-hand theory of dividends is
that a reduction in dividend yield must be offset by a more
than proportionate increase in growth in order to keep a
firm's required return constant, other things held constant.

Back 18

False

Front 19

T/F If the shape of the curve depicting a firm's WACC versus
its debt ratio is more like a sharp "V", as opposed to a
shallow "U", the easier it will be for the firm to maintain a
steady dividend in the face of varying investment
opportunities from year to year.

Back 19

False

Front 20

In the real world, we find that dividends
a. Usually exhibit greater stability than earnings.
b. Fluctuate more widely than earnings.
c. Tend to be a lower percentage of earnings for mature firms.
d. Are usually changed every year to reflect earnings changes.
e. Are usually set as a fixed percentage of earnings.

Back 20

a. Usually exhibit greater stability than earnings.

Front 21

Empirical testing has confirmed the validity of which of the following dividend theories?
a. Dividend irrelevance, or Modigliani-Miller, theory.
b. Bird‑in‑the‑hand theory.
c. Tax differential theory.
d. Empirical testing has produced some evidence in support of
each of the theories above.
e. Empirical testing has not produced any definitive results.

Back 21

d. Empirical testing has produced some evidence in support of
each of the theories above.

Front 22

Which of the following would not have an influence on the optimal dividend policy?
a. The possibility of accelerating or delaying investment
projects.
b. A strong shareholders' preference for current income versus
capital gains.
c. Bond indenture constraints.
d. The costs associated with selling new common stock.
e. All of the above can have an effect on dividend policy.

Back 22

e. All of the above can have an effect on dividend policy.

Front 23

A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?
a. Cash.
b. Common stock.
c. Paid‑in capital.
d. Retained earnings.
e. None of the above.

Back 23

e. None of the above.

Front 24

Stock dividends
a. Have the same effects on financial statements as cash
dividends.
b. Are similar to stock splits in that they do not change the
fundamental position of current share­holders.
c. Must be accompanied by cash dividends.
d. Are viewed unfavorably by investors and thus should not be
used.
e. Have no effect on a firm's balance sheet.

Back 24

b. Are similar to stock splits in that they do not change the
fundamental position of current share­holders.

Front 25

We can be sure that, in and of itself, a stock dividend will not
affect which of the following financial aspects of the firm? (Assume the stock has a par value.)
a. Market value per share.
b. Book value per share.
c. Common stock account .
d. Paid‑in capital account.
e. Total assets.

Back 25

e. Total assets.

Front 26

A stock dividend will, in and of itself, affect the amounts in which of the following accounts? (Assume the stock has a par value.)
a. Common stock account.
b. Paid‑in capital account.
c. Retained earnings account.
d. Cash.
e. Only answers a, b, and c above.

Back 26

e. Only answers a, b, and c above.

Front 27

If the MM hypothesis about dividends is correct, and if one found a
group of companies which differed only with respect to dividend
policy, which of the following statements would be most correct?
a. The residual dividend model should not be used, because it is
inconsistent with the MM dividend hypothesis.
b. The total expected return, which in equilibrium is also equal to
the required return, would be higher for those companies with lower
payout ratios because of the greater risk associated with capital
gains versus dividends.
c. If the expected total return of each of the sam­ple companies were
divided into a dividend yield and a growth rate, and then a scatter
diagram (or re­gression) analysis were undertaken, then the slope
of the regression line (or b in the equation D1/P0 = a + b(g))
would be equal to +1.0.
d. None of the above statements is true.
e. All of the above statements are true.

Back 27

d. None of the above statements is true.

Front 28

If you were to argue that the firm's cost of equity, Ks, increases as
the dividend payout decreases, you would be making an argument with
MM's dividend irrelevance theory, and with Gordon and Lintner's
"bird-in-the-hand" theory.
a. consistent ; consistent
b. inconsistent; consistent
c. consistent ; inconsistent
d. inconsistent; inconsistent
e. the argument above does not make sense; neither theory involves
the cost of equity capital.

Back 28

b. inconsistent; consistent

Front 29

Which of the following statements is most correct?
a. If the dividend irrelevance theory (which is associated with the
names Modigliani and Miller) were exactly correct, and if this
theory could be tested with "clean" data, then we would find, in a
regression of dividend yield and capital gains, a line with a slope
of -1.0.
b. The tax preference and bird-in-the-hand theories lead to identical
conclusions as to the optimal dividend policy.
c. If a company raises its dividend by an unexpectedly large amount,
the announcement of this new and higher dividend is generally
accompanied by an increase in the stock price. This is consistent
with the Bird-in-the-Hand theory, and Modigliani and Miller used
these findings to support their position on dividend theory.
d. If it could be demonstrated that a clientele effect exists, this
would suggest that firms could alter their dividend payment
policies from year to year to take advan

Back 29

a. If the dividend irrelevance theory (which is associated with the
names Modigliani and Miller) were exactly correct, and if this
theory could be tested with "clean" data, then we would find, in a
regression of dividend yield and capital gains, a line with a slope
of -1.0.

Front 30

Which of the following statement completions is most
correct? If investors prefer dividends to capital gains,
then
a. The equilibrium return, Ks, will not be affected by a
change in dividend policy because tax effects will
offset these preferences.
b. Ks will decrease as dividends are reduced.
c. Ks will increase as dividends are reduced.
d. Ks will decrease as the retention rate increases.
e. Dividend policy as determined by the residual dividend
model is the only dividend policy which will maximize
the price per share of common stock.

Back 30

c. Ks will increase as dividends are reduced.

Front 31

A decrease in a firm's willingness to pay dividends is likely to result from an increase in its
a. Earnings stability.
b. Access to capital markets.
c. Profitable investment opportunities.
d. Collection of accounts receivable.
e. Stock price.

Back 31

c. Profitable investment opportunities.

Front 32

Modigliani and Miller (MM) argued that dividend policy is
irrelevant. On the other hand, Gordon and Lintner (GL) argued
that dividend policy does matter. GL's argument rests on the
contention that
a. Ks = D1/P0 + g is constant for any dividend policy.
b. Because of perceived differences in risk, investors value a
dollar of dividends more highly than a dollar of expected
capital gains.
c. Investors, because of tax differentials, value a dollar of
expected capital gains more highly than a dollar of
dividends.
d. Most investors will reinvest rather than spend dividends, so
it would save investors money (taxes) if corporations simply
reinvested earnings rather than paid them out as dividends.
e. None of the above.

Back 32

b. Because of perceived differences in risk, investors value a
dollar of dividends more highly than a dollar of expected
capital gains.

Front 33

If a firm adheres strictly to the residual dividend model, then
if its optimal capital budget requires the use of all earnings
for that year (along with new debt according to the optimal
debt/total assets ratio), the firm should pay
a. No dividends except out of past retained earnings.
b. No dividends to common stockholders.
c. Dividends, in effect, out of a new issue of common stock.
d. Dividends by borrowing the money (debt).
e. Either c or d above could be used.

Back 33

b. No dividends to common stockholders.

Front 34

Which of the following statements is most correct?
a. The open market type of dividend reinvestment plan is the best
type for firms which need to bring in new equity capital.
b. Stock dividends provide investors with additional shares of
stock, not cash, yet cash must be paid in the form of taxes on
the value of the stock dividends. For this reason, stock
dividends are rarely used today.
c. Companies can repurchase shares either to change their capital
structures or else to distribute cash to stockholders in a
manner other than by paying dividends. In either case, tax
considerations will probably play a key role in the decision
to repurchase or not repurchase shares.
d. If the curve relating the WACC and the debt ratio looks like a
sharp 'V', this makes it more feasible for a firm to follow
the residual dividend policy than if the curve looks like a
shallow bowl (or a shallow 'U').
e. The above statements

Back 34

c. Companies can repurchase shares either to change their capital
structures or else to distribute cash to stockholders in a
manner other than by paying dividends. In either case, tax
considerations will probably play a key role in the decision
to repurchase or not repurchase shares.

Front 35

If a firm adheres strictly to the residual dividend model, a
sale of new common stock by the company would suggest that
a. The dividend payout ratio has remained constant.
b. The dividend payout ratio is increasing.
c. No dividends were paid for the year.
d. The dividend payout ratio is decreasing.
e. The dollar amount of investments has decreased.

Back 35

c. No dividends were paid for the year.

Front 36

The stockholders of NPI have just been notified that their stock will split 2 for 1 this year. How will this affect the relative amounts of debt and equity in the firm?
(A) Both debt and equity will increase.
(B) Only equity will increase.
(C) The amount of debt will decrease.
(D) No change in the amounts of debt and equity will occur.

Back 36

(D) No change in the amounts of debt and equity will occur.

Front 37

The use of stock options is common in employment contracts for which of the following reasons?
a. It is quick way of raising cash.
b. It aligns the motivations of the employees and the owners.
c. It is cheaper than bonds in the long run.
d. It may never be exercised and therefore cost the firm nothing.
e. None of the above is a justifiable reason.

Back 37

b. It aligns the motivations of the employees and the owners.

Front 38

T/F The preemptive right gives current stockholders the
right to purchase, on a pro rata basis, any new shares
sold by the firm. This right protects current
stockholders against both dilution of control and
dilution of value.

Back 38

True

Front 39

T/F One of the advantages of common stock financing is that
there is no dilution of owner's equity, as there is
with debt.

Back 39

False

Front 40

T/F When stock in a closely held corporation is offered to
the public for the first time the transaction is called
"going public" and the market for such stock is called
the new issue market.

Back 40

True

Front 41

T/F Flotation costs under a best‑efforts offering are
typically less for a given new equity issue than the
costs associated with an underwritten offering, and the
corporation is more certain of getting the needed funds
under a best-efforts arrangement. This is why best
efforts deals are most common.

Back 41

False

Front 42

T/F Going public establishes a true market value for the
firm and ensures that a liquid market will always exist
for the firm's shares.

Back 42

False

Front 43

T/F Preferred stockholders have priority over common
stockholders with respect to earnings. Dividends must
be paid on preferred stock before they can be paid on
common stock. In exchange for this priority to
dividends, preferred stockholders give up their
priority claims to common stockholders in the event of
bankruptcy.

Back 43

False

Front 44

T/F The cost of meeting SEC and possible additional state
reporting requirements regarding disclosure of certain
financial information about the firm, the danger of
losing control, and the possibility of an inactive
market or low stock price are all potential
disadvantages of going public.

Back 44

True

Front 45

T/F Investment bankers are not really like commercial
"bankers" in the sense of taking deposits and issuing
loans; rather, they help firms issue securities in the
secondary market and their activities are limited to
raising new equity capital.

Back 45

False

Front 46

T/F In general, when a firm decides to raise capital there
are stage I and stage II decisions. Stage I decisions
include the amount to be raised and the type of
security to be issued. Once the type of security is
chosen this is a decision that cannot be changed in
stage II.

Back 46

False

Front 47

T/F When new shares are being sold, if it appears that the
investment bankers will be unable to sell the entire
issues at the initial offering price, the only way the
entire issue can be sold is to lower the price.

Back 47

False

Front 48

T/F A firm may go public, yet the firm itself may not
receive any additional funds in the process.

Back 48

True

Front 49

T/F Listing provides a company with some “free”
advertising, and status as a listed company may enhance
the firm's prestige.

Back 49

True

Front 50

T/F Zero coupon bonds are bought primarily by pension
funds and other tax exempt investors because taxpaying
investors would have to pay taxes on "interest earned“
over the life of the bond yet would earn no cash
income with which to pay the taxes.

Back 50

True

Front 51

T/F "Treasury zeros" are Treasury bonds that have been
split or "stripped" into a zero coupon discount
Treasury certificate and a series of interest payments
(the coupon payments). These bonds are safer than
corporate zeros and thus, are very popular with
institutional investors such as pension fund managers.

Back 51

True

Front 52

T/F When a firm refunds a debt issue, the firm gains and
bondholders lose. This points out the risk of a call
provision to bondholders and why bonds without a call
feature command higher prices than callable bonds.

Back 52

True

Front 53

T/F If the firm applies the after-tax cost of marginal
debt as the discount rate in analyzing a refunding
decision, and the NPV of refunding is positive, the
firm should immediately refund the outstanding debt
issue and replace it with a cheaper issue.

Back 53

False

Front 54

Common equity refers to the sum of which of the following
balance sheet accounts?
a. Common stock and retained earnings
b. Book value, retained earnings, and common stock
c. Par value, additional paid-in capital, retained
earnings
d. Either answer a or c above could be correct depending on
whether the firm has "par" or "no par" stock.
e. Both b and c are correct since additional paid-in capital
is equivalent to book value.

Back 54

d. Either answer a or c above could be correct depending on
whether the firm has "par" or "no par" stock.

Front 55

The preemptive right is important to shareholders because
it
a. Allows management to sell additional shares below the
current market price.
b. Protects the current shareholders' against dilution of
ownership interests.
c. Is included in every corporate charter.
d. Will result in higher dividends per share.
e. The preemptive right is not important to shareholders.

Back 55

b. Protects the current shareholders' against dilution of
ownership interests.

Front 56

Companies can issue different classes of common stock.
Which of the following statements concerning stock classes
is most correct?
a. All common stocks fall into one of three classes: A,
B, and C.
b. Most firms have several classes of common stock
outstanding.
c. All common stock, regardless of class, must have voting
rights.
d. All common stock, regardless of class, must have the same
dividend privileges.
e. None of the above statements is necessarily true.

Back 56

e. None of the above statements is necessarily true.

Front 57

Which of the following is not an advantage of going
public?
a. It allows a firm's founders to diver­sify their holdings.
b. It increases the liquidity of the stock.
c. It establishes a value for the firm.
d. It makes it easier to raise new equity capital in the
future.
e. All of the above are advantages of going public.

Back 57

e. All of the above are advantages of going public.

Front 58

Large, well-known public companies can reduce the time
required to register and issue securities by using a(n)
a. Shelf registration.
b. Subchapter S registration.
c. Underwriting syndicate.
d. Secondary market registration.
e. "Red herring" registration.

Back 58

a. Shelf registration.

Front 59

When new common stock is offered for sale to the public
through investment bankers, the investment bankers may
provide potential investors with informa­tion contained in a
statement called the
a. Indenture.
b. Trust agreement.
c. "Red herring" prospectus.
d. Proxy.
e. Security agreement.

Back 59

c. "Red herring" prospectus.

Front 60

Which of the following statements is most correct?
a. One danger a family-owned business faces when it goes
public is the loss of absolute voting control of the
company, because there is no way to keep new
stockholders from voting.
b. The market is less active for small companies' shares,
so these stocks must be included on the SEC's list in
order to inform investors of their existence.
Therefore, "listed shares" as the term is generally
used refers to shares of smaller as opposed to larger
companies.
c. Before a company can offer a new issue of common stock
to the public, it must get approval from the SEC for
the price at which the stock can be sold. If the SEC
thinks the proposed price is too high, then the
company's prospectus is deemed to be a "red herring,“
and the stock cannot be sold.
d. The preemptive right refers to stockholder

Back 60

e. Each of the above statements is false.

Front 61

Which of the following statements is most correct?
a. In a reverse split, a company reduces the number of shares
outstanding in order to stabilize and provide a floor for a
rapidly declining stock price.
b. In theory, dividends are determined as a residual item. Therefore,
in order to conserve earnings for better future earnings
opportunities, the poorer the firm's investment opportunities, the
lower its dividend payments should be.
c. The farther to the right the IOS is the higher a firm's dividend
payout ratio, other things held constant.
d. Even if a stock split has no information content, and even if the
dividend per share adjusted for the split does not increase, there
can still be a real benefit (i.e., a higher value for shareholders)
from such a split, but any such benefit is probably small.

Back 61

d. Even if a stock split has no information content, and even if the
dividend per share adjusted for the split does not increase, there
can still be a real benefit (i.e., a higher value for shareholders)
from such a split, but any such benefit is probably small.

Front 62

Which of the following is usually cited as a disadvantage of issuing
new common stock as a method of financing?
a. Common stock does not have a maturity date, thus it is an open-end
commitment of the firm's earnings.
b. Since sale of common stock increases the number of owners and the
amount of capital at risk, the firm's bond rating is usually
negatively affected and its cost of debt rises.
c. If the firm currently has more equity than its optimal capital
structure dictates and it issues more equity, then the average cost
of capital will most likely rise.
d. Common stock is not an attractive option if the firm seeks to
increase its reserve borrowing capacity.

Back 62

c. If the firm currently has more equity than its optimal capital
structure dictates and it issues more equity, then the average cost
of capital will most likely rise.

Front 63

Which of the following statements concerning common stock
is false?
a. The preemptive right protects shareholders by
(1) providing the opportunity to retain existing
proportionate ownership, and (2) protecting against
dilution of value.
b. Companies are required by law to issue only one class of
common stock, although the rights and privileges
associated with shares within that class may vary.
c. Institutional investors hold less than one-half of the
common stock outstanding, but their active trading and
large block trades mean that they have a strong
influence on stock prices.
d. The decision to go public is a major event, while the
decision to list the stock is less meaningful.
e. A company whose stock is all owned by a few people
(typically its managers) is said to be "privately owned“
or "closely held."

Back 63

b. Companies are required by law to issue only one class of
common stock, although the rights and privileges
associated with shares within that class may vary.

Front 64

Which of the following statements is false?
a. When a corporation's shares are owned by a few individuals who are
associated with or are the firm's management, we say that the firm
is "closely held."
b. A publicly owned corporation is simply a company whose shares are
held by the investing public, which may include other corporations
and institutions as well as individuals.
c. Going public establishes a true market value for the firm and
ensures that a liquid market will always exist for the firm's
shares.
d. When stock in a closely held corporation is offered to the public
for the first time the transaction is called "going public" and the
market for such stock is called the new issue market.

Back 64

c. Going public establishes a true market value for the firm and
ensures that a liquid market will always exist for the firm's
shares.

Front 65

Which of the following statements about listing on a stock
exchange is most correct?
a. Listing is a decision of more significance to a firm than going
public.
b. Any firm can be listed on the NYSE as long as it pays the listing
fee.
c. Listing provides a company with some "free" advertising, and
status as a listed company may enhance the firm's prestige.
d. Listing reduces the reporting requirements for firms, because
listed firms file reports with the exchange rather than with the
SEC.
e. Statements b and c are both correct.

Back 65

c. Listing provides a company with some "free" advertising, and
status as a listed company may enhance the firm's prestige.

Front 66

Which of the following statements is most correct?
a. In a going private transaction, 51 percent of a firm's
stock is purchased by another firm.
b. Going private produces administrative cost savings in that
private firms are not required to publish annual reports
or file with the SEC.
c. Going private is usually accompanied by a drastic
reduction in the firm's financial leverage.
d. A private firm normally has less shareholder participation
than a publicly held firm.
e. Statements c and d are both correct.

Back 66

b. Going private produces administrative cost savings in that
private firms are not required to publish annual reports
or file with the SEC.

Front 67

Which of the following statements is most correct?
a. In a private placement, securities are sold to private
(individual) investors rather than to institutions.
b. Private placements occur most frequently in stock issues,
but bonds can also be sold by private placement.
c. Private placements are convenient for issuers, but the
convenience is offset by higher flotation costs.
d. The SEC requires that all private placements be handled by
an investment banker.
e. The above statements are all false.

Back 67

e. The above statements are all false.

Front 68

T/F Leasing is typically a financing decision and not a
capital budgeting decision. Thus, the availability of
lease financing cannot affect the capital budgeting
decision.

Back 68

False

Front 69

T/F The full amount of a lease payment is tax deductible if
the contract is a guideline lease.

Back 69

True

Front 70

T/F The higher an asset's residual value, the more logical
it is to own the asset rather than lease it.

Back 70

True

Front 71

T/F Leasing is often referred to as off-balance sheet
financing because lease payments are shown as operating
expenses on a firm's income statement, and under
certain conditions, leased assets and associated
liabilities do not appear on the firm's balance sheet

Back 71

True

Front 72

T/F The full amount of a lease payment is tax deductible if
the contract is a non-guideline lease.

Back 72

False

Front 73

T/F The proper discount rate for lease analysis is the
Weighted Average Cost of Capital (WACC) which
represents the opportunity cost to the stockholders of
the leasing firm.

Back 73

False

Front 74

T/F If the NAL borrow-lease < 0, the leasee should lease
the asset rather than borrow/buy.

Back 74

False

Front 75

T?F A leveraged lease is more risky from the lessee’s
standpoint than is an unleveraged lease.

Back 75

False

Front 76

T/F Many leases written today combine the features of
operating and financial leases. Such leases could
be called “combination leases.”

Back 76

True

Front 77

T/F A sale and leaseback arrangement is a type of
financial, or capital, lease.

Back 77

True

Front 78

T/F Capital or financial leases generally provide for
maintenance service on the part of the lessor and
can be refinanced at the discretion of the lessee.

Back 78

False

Front 79

T/F Operating leases help to pass the risk of
obsolescence from the user to the lessor.

Back 79

True

Front 80

T/F Under a sale and leaseback arrangement, the
seller is the lessee and the buyer is the lessor.

Back 80

True

Front 81

T/F Assume that a piece of leased equipment has a
high rather than a low residual value. From the
lessee's viewpoint, it might be better to own the
asset than to lease it because with a high
residual value the lessee will likely face a
higher lease rate.

Back 81

False

Front 82

T/F If a leased asset has a negative residual value,
for example, as a result of a statutory
requirement to dispose of an asset in an
environmentally sound manner, the lessee of the
asset could reasonably expect to pay a lower
lease rate because the asset does not have a
positive residual value.

Back 82

False

Front 83

In a lease arrangement, the user of the asset is: 
a. Lien
b. Lessee
c. Lessor
d. Lease

Back 83

b. Lessee

Front 84

In a lease arrangement, the owner of the asset is the: 
a. Lessor
b. Lessee
c. Lien
d. None of the above

Back 84

a. Lessor

Front 85

Lease payments can be thought of as: 
a. An ordinary annuity
b. An annuity due
c. A series of unequal payments
d. None of the above

Back 85

b. An annuity due

Front 86

Leveraged leases are a form of: 
a. Operating lease
b. Financial lease
c. Lease which considerably reduces lessee's obligations
d. All of the above

Back 86

b. Financial lease

Front 87

Which of the following statements is not true? I) The lessee does not have to buy the equipment II) The lessee is responsible for making the lease payments III) The lease payments are not tax-deductible IV) The lessee gives up the depreciation tax shield 
a. I only
b. II only
c. III only
d. I, II, and IV only

Back 87

c. III only

Front 88

Sale and lease back arrangements are prevalent in: 
a. Air-crafts
b. Computers
c. Real estate
d. Standard industrial equipment

Back 88

c. Real estate

Front 89

If the lessor borrows much of the purchase price of a leased asset, the lease is called: 
a. A leveraged lease
b. A sale-and-leaseback
c. A capital lease
d. A non-recourse lease

Back 89

a. A leveraged lease

Front 90

 The following are sensible reasons for leasing except: 
a. Short-term leases are convenient
b. Standardization leads to low administrative and transaction costs
c. Leasing preserves capital
d. Lease cancellation options are valuable

Back 90

c. Leasing preserves capital

Front 91

The following are sensible reasons for leasing: I) Maintenance is provided II) Tax shields can be used III) Leasing avoids capital expenditure controls IV) Avoiding the alternative minimum tax 
a. I and II only
b. I, II, and III only
c. I, II, III and IV
d. I, II and IV only

Back 91

d. I, II and IV only

Front 92

 The following are sensible reasons for leasing: I) Short-term leases are convenient II) Standardization leads to low administrative and transaction costs III) Lease cancellation options are valuable IV) Tax shields can be used 
a. I and II only
b. I, II and III only
c. I, II, III and IV
d. I, II, and IV only

Back 92

c. I, II, III and IV

Front 93

The following are dubious reasons for leasing: I) Leasing avoids capital expenditure controls II) Leasing preserves capital III) Leasing can make the firm's balance sheet and income statement look better by increasing book income or decreasing book assets or both IV) Avoiding the alternative minimum tax 
a. I and II only
b. I, II and III only
c. I, II, III and IV
d. I, II and IV only

Back 93

b. I, II and III only

Front 94

 FASB defines capital lease as leases that meet the following: I) The lease agreement transfers ownership to the lessee before the lease expires. II) The lessee can purchase the asset for a bargain price when lease expires. III) The lease lasts for at least 75% of the asset's estimated economic life. IV) The present value of the lease payments is at least 90% of the asset's value. 
a. I or II
b. I or II or III
c. I or II or III or IV
d. II or III or IV

Back 94

c. I or II or III or IV

Front 95

The riskiness of the cash flows to the lessee, with the possible
exception of residual value, is about the same as the riskiness of the lessee's
a. Equity cash flows.
b. Capital budgeting project cash flows.
c. Debt cash flows.
d. Pension fund cash flows.
e. None of the above.

Back 95

c. Debt cash flows.

Front 96

Which of the following statements is most correct?
a. Firms which use "off balance sheet" financing, such as leasing,
will show lower debt ratios once the effects of their leases are
reflected in their financial statements.
b. 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.
c. The fixed charges associated with a lease can be as high as, but
never be greater than, the fixed payments associated with a loan.
d. Capital, or financial, leases generally provide for maintenance
service on the part of the lessor and can be refinanced at the
discretion of the lessee.
e. A key difference between a capital lease and an operating lease is
that with a capital lease, the total lease payments on the asset
are roughly equal to the full price of the asset plus a return on
the investment in the asset.

Back 96

e. A key difference between a capital lease and an operating lease is
that with a capital lease, the total lease payments on the asset
are roughly equal to the full price of the asset plus a return on
the investment in the asset.

Front 97

In the lease versus buy decision, leasing is often preferable
a. Since it does not limit the firm's ability to borrow to make
other investments.
b. Because, generally, no down payment is required, and there are no
indirect interest costs.
c. Because lease obligations do not affect the riskiness of the
firm.
d. All of the above are correct statements.
e. None of the above are correct statements.

Back 97

e. None of the above are correct statements.

Front 98

Heavy use of off-balance sheet lease financing will tend to
a. Make a company appear more risky than it actually is because its
stated debt ratio will appear higher.
b. Make a company appear less risky than it actually is because its
stated debt ratio will appear lower.
c. Affect a company's cash flows but not its degree of risk.
d. Have no effect on either cash flows or risk because the cash
flows are already reflected in the income statement.

Back 98

b. Make a company appear less risky than it actually is because its
stated debt ratio will appear lower.

Front 99

The lease analysis should compare the cost of leasing to the
a. Cost of owning using debt.
b. Cost of owning using equity.
c. After-tax cost of debt to measure the effect of leasing on the
cost of equity.
d. Average cost of all fixed charges.
e. Cost of owning using the weighted average cost of capital for the
firm.

Back 99

a. Cost of owning using debt.

Front 100

Operating leases usually have terms that include
a. Maintenance of the equipment.
b. Only partial amortization.
c. Cancellation clauses.
d. All of the above.
e. Only answers a and c above.

Back 100

d. All of the above.

Front 101

According to class notes, the following are dubious reasons for leasing, except:
a. Leasing avoids capital expenditure controls.
b. Leasing preserves capital.
c. Leases may be off balance sheet financing.
d. Leasing effects book income.
e. All of the above are dubious reasons.

Back 101

e. All of the above are dubious reasons.

Front 102

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. Value of the leased asset as a fixed asset.
b. Present value of future lease pay­ments as an asset.
c. Present value of future lease pay­ments as a liability.
d. Both a and b above.
e. Both a and c above.

Back 102

e. Both a and c above.

Front 103

The following are sensible reasons for leasing, except:
a. Short-term leases are convenient.
b. Cancellation options are valuable.
c. Maintenance is provided.
d. Tax shields can be used.
e. All the above are sensible reasons to lease.

Back 103

e. All the above are sensible reasons to lease.