GCU FIN 650 GC Week 8 exam 3/GCU FIN 650 GC Week 8 exam 3/GCU FIN 650 GC Week 8 exam 3

Question 1. A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased
A. is financed with short-term debt.
B. is financed with long-term debt.
C. is financed with debt whose maturity matches the term of the lease.
D. is financed with a mix of debt and equity based on the firm’s target capital structure, i.e., at the WACC.
E. is financed with retained earnings
Question 2. In the lease versus buy decision, leasing is often preferable
A. because it has no effect on the firm’s ability to borrow to make other investments.
B. because, generally, no down payment is required, and there are no indirect interest costs.
C. because lease obligations do not affect the firm’s risk as seen by investors.
D. because the lessee owns the property at the end of the least term.
E. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
Question 3. 10 years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.

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