Question Details

The problem of dilution never arises with call options, but it can
arise with warrants.



i. Leasing is typically a financing decision and not a capital
budgeting decision. Thus, the availability of lease financing
cannot affect the capital budgeting decision.
a. True
b. False
ii. The full amount of a lease payment is tax deductible if the
contract is a genuine lease.
a. True
b. False
iii. The riskiness of the cash flows to the lessee, with the possible
exception of residual value, is about the same as the riskiness of
the lessee's
a. Equity cash flows.
b. Capital budgeting project cash flows.
c. Debt cash flows.
d. Pension fund cash flows.
e. None of the above.
iv. Redstone Corporation is considering a leasing arrangement to
finance some special manufacturing tools that it needs for
production during the next three years. A planned change in the
firm's production technology will make the tools obsolete after 3
years. The firm will depreciate the cost of the tools on a
straight-line basis. The firm can borrow $4,800,000, the purchase
price, at 10 percent on a simple interest loan to buy the tools, or
it can make three equal end-of-year lease payments of $2,100,000.
The firm's tax rate is 40 percent. Annual maintenance costs
associated with ownership are estimated at $240,000. What is the
net advantage to leasing (NAL)?
a. $ 0
b. $106,200
c. $362,800
d. $433,100
e. $647,900
v. The problem of dilution never arises with call options, but it can
arise with warrants.
a. True
b. False




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