Chapter 25, Problem 5PS

Lease characteristics* True or false?

1. a. Lease payments are usually made at the start of each period. Thus, the first payment is usually made as soon as the lease contract is signed.
2. b. A sensible motive for financial leases is that they provide off-balance-sheet financing.
3. c. The cost of capital for a financial lease is the pretax interest rate the company would pay on a bank loan.
4. d. An equivalent loan’s principal plus after-tax interest payments exactly match the after-tax cash flows of the lease.
5. e. A financial lease should not be undertaken unless it provides more financing than the equivalent loan.
6. f. It makes sense for firms that pay no taxes to lease from firms that do.
7. g. Other things equal, the net tax advantage of leasing increases as nominal interest rates increase.