Financial Management: Theory & Practice
15th Edition
ISBN: 9781337248006
Author: Eugene F. Brigham; Michael C. Ehrhardt
Publisher: Cengage Learning US
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Chapter 19, Problem 8MC
Summary Introduction
Case Summary:
LS Inc wants to acquire new market data and quotation system for its new home office. The system receives the information from online services and display the data onscreen or may save it for later retrieval and system also allow customers to make call and can convey current quotes. Cost of the equipment is $ 1,000,000 and if the company wants to purchase the equipment, they can borrow a loan at an interest rate of 10%.
Useful life of equipment is 6 years and it comes under 3 years MARCS class or it can purchase a contract of 4 years where $20,000 have to be paid at the beginning of each year and it will be sold after 4 years and the residual value is estimated at $200,000. They thought of opting for leasing which will cost $260,000 and includes maintenance cost. Federal plus state tax is 40%.
To identify: The effects of cancellation clause from lessee and lessor point of view and if person X the lessor will insist to change a similar term if cancellation clauses are added and Whether the cancellation clause contain provisions same as the call premium or penalties or any restrictive covenant contained in bond indentures.
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There are two parties in any lease contract—the lessee and the lessor. To a lessor, a lease analysis involves a capital budgeting analysis of the property or equipment to be leased. The lessor’s decision is either to purchase and lease-out the asset, or not make the investment at all.
Like any capital budgeting decision, the lessor needs to evaluate the rate of return expected to be earned from making the lease. Further, since the cost and other terms of leases involving high-cost items are negotiated, this rate of return information is also important information for a prospective lessee.
From the following statements, identify the steps involved in lease analysis from a lessor’s perspective. Check all that apply.
Determine the lease payments minus income taxes and any maintenance expenses that the lessor must incur as per the lease agreement.
Determine the invoice price of the leased equipment minus any lease payments made in advance.
Determine the periodic…
The lessor would most likely prefer a ________ or ________ lease to an operating lease. Nonoperating lease treatment would permit a financial service company lessor to remove heavy machinery and equipment, jet airlines, oceangoing vessels, and such from its balance sheet and replace it with the ________, a financial asset compatible with the nature of its business. In addition, the nonoperating lease results in the recognition of ________, rather than ________ revenue.
Group of answer choices
standalone; operating; fair value of the leased asset; interest income; rent
direct financing; operating; net investment in the lease; financing income; unearned
standalone price; sales-type; fair value of the leased asset; financing income; unearned
direct financing; sales-type; net investment in the lease; interest income; rent
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Financial Management: Theory & Practice
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