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Fundamentals of Corporate Finance

Stephen A. Ross; Randolph W. Westerfield; Bradford D. Jordan

Chapter 27

LEASING - all with Video Answers

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Chapter Questions

Problem 1

What are the key differences between leasing and borrowing? Are they perfect substitutes?

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Problem 2

Taxes are an important consideration in the leasing decision. Who is more likely to lease, a profitable corporation in a high tax bracket or a less profitable one in a low tax bracket? Why?

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Problem 3

What are some of the potential problems with looking at IRRs in evaluating a leasing decision?

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Problem 4

Comment on the following remarks:
a. Leasing reduces risk and can reduce a firm's cost of capital.
b. Leasing provides 100 percent financing.
c. If the tax advantages of leasing were eliminated, leasing would disappear.

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Problem 5

Discuss the accounting criteria for determining whether or not a lease must be reported on the balance sheet. In each case, give a rationale for the criterion.

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Problem 6

Discuss the IRS criteria for determining whether or not a lease is tax deductible. In each case, give a rationale for the criterion.

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Problem 7

What is meant by the term off-balance sheet financing? When do leases provide such financing, and what are the accounting and economic consequences of such activity?

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Problem 8

Why might a firm choose to engage in a sale and lease-back transaction? Give two reasons.

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Problem 9

Explain why the aftertax borrowing rate is the appropriate discount rate to use in lease evaluation.
Refer to the following example for Questions 10 through 12:

In April 2014, International Lease Finance Corporation (ILFC) announced a deal to purchase eight Airbus A330-200 and A350-900 passenger aircraft. ILFC then signed a long-term lease contract on the planes with Azul Linhas Aéreas Brasileiras to be used for flights from Brazil to the United States.

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Problem 10

Why wouldn't Azul purchase the planes if they were obviously needed for the company's operations?

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Problem 11

Why would ILFC be willing to buy planes from Boeing and then lease them to Azul? How is this different from just lending money to Azul to buy planes?

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Problem 12

What do you suppose happens to the planes at the end of the lease period?

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