1. ____ Which of the following statements about leasing is correct? (4’) a. Capi

Question

1.       ____ Which of the following statements about leasing is correct? (4’)

a.       Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.

b.      The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.

c.       Capital, or financial, leases generally provide for maintenance by the lessor.

d.      A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset, whereas with an operating lease the lessor depends on the residual value to realize a full return of the investment.

Explanation / Answer

Answer is d.      A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset, whereas with an operating lease the lessor depends on the residual value to realize a full return of the investment.

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