Chapter 21: Term Loans and Leases MCQs

Multiple-Choice Quiz

Chapter 21:   Term Loans and Leases

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1. One difference between a financial lease and operating lease is that:

there is a often a call option in a financial lease.

there is often an option to buy in an operating lease.

an operating lease is often cancellable by the lessee.

a financial lease is often cancellable by the lessee.

2. The principal reason for the existence of leasing is that:

intermediate-term loans are difficult to obtain.

this is a type of financing unaffected by changes in tax law.

companies, financial institutions, and individuals derive different benefits from owning assets.

leasing is a renewable source of intermediate-term funds.

3. A way to analyze whether debt or lease financing would be preferable is to:

compare the net present values under each alternative, using the cost of capital as the discount rate.

compare the net present values under each alternative, using the after-tax cost of borrowing as the discount rate.

compare the payback periods for each alternative.

compare the effective interest costs involved for each alternative.

4. A conventional revolving credit agreement allows a firm:

to borrow a fixed amount for the entire commitment period.

to borrow for a short-period with a right to renew the loan during the commitment  period.

to possibly include a provision to convert the credit agreement into a term loan  contract at maturity.

to do all of the above.

5. The type of lease that includes a third party, a lender, is called a(n):

sale and leaseback.

direct leasing arrangement.

leveraged lease.

operating lease.

6. One advantage of a financial lease is that:

it has a shorter maturity than term loans.

it never appears as a liability on the balance sheet.

it eliminate the needs to make periodic payments.

it provides a way to indirectly depreciate land.

7. Medium-term notes (MTNs) have maturities that range up to

one year (but no more).

two years (but no more).

ten years (but no more).

thirty years (or more)               Correct!

                             That´s why MEDIUM-TERM is a bit of a  misnomer.

8. A direct lease, a sale and leaseback, and a leveraged lease are all examples of

operating leases.

financial leases.

full-service leases.

"off-balance sheet" methods of financing.