CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which of the following does NOT favor a capital lease?
A. The lessee is in a high tax bracket.
B. Compensation contracts are based on return on capital benchmarks.
C. The lessor can obtain a higher salvage value.
Explanation: Capitalizing a lease increases total assets and the capital base. This discourages capital leases, as profits have to be higher to meet or exceed return on capital benchmarks.

User Contributed Comments 7

User Comment
rgat why would a higher tx % favor capital?
rgat CapL_Depr + IntPortion of LeasePayment < OpL_Rent Only -->
Cap_NetInc < Op_NetInc -->
Cap_TaxExp < Op_TaxExp -->
Therefore the tax shelter that this provides is magnified with higher Tx %
sheenalim why is a lessor able to obtain a higher salvage value?
serboc Operating leases have better ratios because of no DEBT
lsum B seems correct from the perspective of lessee.
However not necessary true for Lessor? B answer is not clear from which perspective.
bmesfin Would not a leasee in a high tax bracket prefer an operating lease.
SKIA bmesfin: A leasee would not prefer an operating lease in a high tax bracket. If they are in a high tax bracket, capitalizing gives them more assets to depreciate to take as a charge against income, lowering their tax expense.
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