CFA Practice Question

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CFA Practice Question

Which of the following does NOT favor a capital lease?
A. The lease period is longer.
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 2

User Comment
gill15 Why would having a high salvage value favor a capital lease? I chose C here.

I'm thinking if there is a high salvage value the lessor would want to keep the Asset and run an operating lease. Once the operating lease is done he can sell it at the high salvage value. Whats going one?
alles You are right. But I guess it's because we should look from the perspective of the lessee (who doesn't care about the lessor being able to obtain a higher salvage value). But if it's this, the question should have specified.
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