Question

You may come across several situations where you may need to dedide whether to lease or to buy assets, such as equipment, a car, a house, and so forth. You may have several apportunities where you may need to evaluate leases from either a lessee's or a lessor's perspective. Thus, it is important to understand certain issues and benefits related to leases and the fine print used in lease contracts. Based on your understanding of leases, which of the following statements are true? Statements True False The concepts invalved in the analysis of real estate leasing is contrary to the concepts involved in the analysis of equipment leasing. A firm with leases instead oflong-berm loans is likely to appear stronger in a O superficial credit analysis. If the tax laws changed to allow companies to depreciate their equipment oera O shorter period of time, the lessor would get larger tax credits and fasber depreciation write-offs Lease contracts in which residual values are very high are likely to have lower O costs for leasing.

Answer 1

The concepts involved in the analysis of real estate leasing is contrary to the concepts involved in equipment leasing - FALSE.

The basic concept of leasing , the crucs of it never change- be it real estate leasing or equipment leasing. Both the leases are for a fixed predetermined time period, both involve annual lease payments flowing from lessee to lessor. In both cases, the ownership of the asset remains with the lessor and depreciation on the asset is accordingly charged by the lessor only. So the concepts are essentially the same.

A firm with leases instead of long-term loans is likely to appear stronger in a superficial credit analysis -TRUE

Leased equipment usually serves as the collateral needed to secure the transaction. A lease with a Fair Market Value purchase option allows the lessee to return the equipment without further obligation when the lease ends or purchase the equipment at its fair market value or other agreed price.

Lease contracts in which residual values are high are likely to have lower costs of leasing - TRUE.

Annual lease payments compensate the lessor for the cost that he has incurred in purchasing the asset. so if after the end of the lease term , there is high residual value which will benefit the lessor, he will charge less annual lease payments as he needs to be compensated less. This makes the given statement true.