Bf14e Tb Ch15

8/19/2019 Bf14e Tb Ch15

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CHAPTER 15Financing Corporate Real Estate

TRUE/FALSE

1. For a large corporation with a good credit rating seeking to finance corporate real estate, the

cost of a mortgage loan may be greater than the cost of unsecured corporate debt. (T)

2. Because real estate is shown on the corporations books at its historical cost less bookdepreciation, the !alue of corporate real estate is often considered "hidden# fromshareholders. (T)

$. Because real estate usually declines in !alue faster than accounting depreciation, it isreasonable to assume that the property has %ero !alue at the end of the lease term. (F)

&. ' company estimates that the incremental cost of owning a parcel of real estate !s. leasingwill be 1. The company e*pects a 12 rate of return on in!estments. Therefore realestate should be owned and not leased. (F)

+. n general, if a company assumes that the residual !alue at the end of the holding period isalways e-ual to the book !alue, the decision to own !ersus lease will be biased towardsowning. (F)

. /imilar to decisions about owning or leasing e-uipment, the decision to own or lease aproperty is basically 0ust a choice between two financing alternati!es. (F)

. The residual !alue at the end of the holding period should be based on the market !alue ofthe real estate and not the book !alue. (T)

. 3on4recourse debt, such as a mortgage on a specific property, typically has a lower rate

than the unsecured debt of companies with high credit ratings. (F)

5. 'n operating lease does not affect a corporate balance sheet. (T)

1. Because accounting depreciation charges often e*ceed the true economic depreciation ofreal estate, the earnings of companies owning real estate typically understate the le!el ofoperating cash flow. (T)

11. ' company can di!ersify its business acti!ities by de!eloping, owning and subse-uentlyleasing real estate to other companies. Because of the di!ersification benefits, shareholder!alue is always increased. (F)

12. f the incremental cash flows from owning !ersus leasing are compared without e*plicitlyconsidering debt financing, these returns should be compared to the firms cost of e-uity. (F)

1$. f a companys space re-uirements are far less than what is optimal to de!elop on a gi!ensite, leasing would tend to be more fa!orable. (F)

MULTIPLE CHOICE

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1&. For which of the following reasons would a business prefer to own real estate rather thanlease it6 (')

(') f the business demands speciali%ed or uni-ue facilities(B) 7wning allows the business to de!elop skills in operating, maintaining, and repair real

estate and the associated facilities

(8) 7wning reduces operating fle*ibility(9) The capital commitments with owning are lower than the capital commitments

associated with leasing(:) 'll of the abo!e are reasons a business would prefer to own space rather than lease it

1+. ;hy might it be argued that corporations do not ha!e a comparati!e ad!antage whenin!esting in real estate as a means of di!ersification from the core business6 (B)

(') 8orporations cannot react as -uickly as indi!idual in!estors to changes in marketconditions

(B) 8orporations do not typically hold real estate in a large number of geographic areas andmay not hold a !ariety of different types of properties

(8) 8orporations often use property managers who do not understand financial markets(9) 9i!ersification dilutes a corporations risk4return profile and does not pro!ide an

ad!antage to corporations

1. ' company is planning to mo!e to a larger office and is trying to decide if the new officeshould be owned or leased. 8ash flows for owning !ersus leasing are estimated as follows.

'ssume that the cash flows from operations will remain le!el o!er a 1 year holding period.f purchased, the company will in!est <$+, in e-uity and finance the remainder with aninterest4only loan that has a balloon payment due in year 1. The after4ta* cash flow fromsale of the property at the end of year 1 is e*pected to be <+,. ;hat is theincremental rate of return on e-uity to the company, if the property is owned instead ofleased6 (B)

7wn =ease/ales 1,, 1,,8ost of goods sold +, +,>ross income +, +,7perating e*penses? Business 1$, 1$, @eal estate , ,=ease payments 12,nterest 5, 9epreciation $+, Ta*able income 1+, 15,

Ta* ++,+ +,ncome after ta* 125,+ 1$$,Alus? 9epreciation $+,

'fter4ta* cash flow 1&,+ 1$$,

(') 1.55(B) 1$.2(8) 1.$2(9) 12.2

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1. ;hich of the following ta* law changes has reduced the incenti!e for indi!iduals to lease tocorporations as a part of the Ta* @eform 'ct of 156 (8)

(') 9epreciation li!es were lengthened(B) The highest marginal ta* rate for corporations is much lower than the highest marginal

ta* rate for indi!iduals

(8) ndi!iduals are sub0ect to limitations on "passi!e# losses used to offset other ta*ableincome

(9) ncome from corporations are no longer double ta*ed

1. ;hich of the following factors does 37T represent an effect of corporate real estateownership on corporate financial statements6 (9)

(') The unreali%ed source of potential gain from the sale of property is not represented onannual income statements

(B) ncome represented on accounting statements may underestimate the actual cash flowspro!ided by property

(8) The book !alue of property on the balance sheet may not represent the actual market

!alue(9) The corporations o!erall debt ratio may be reduced, and property is carried at book

!alue but financed at market !alue

15. ;hich of the following conditions will 37T cause a lease to be categori%ed as a capitallease6 (')

(') t e*tends for at least 5 percent of the assets life(B) t transfers ownership to the lessee at the end of the lease term(8) t seems likely that ownership will be transferred to the lessee at the end of the lease

term because of a "bargain purchase# option(9) The present !alue of the contractual lease payments e-uals or e*ceeds 5 percent of

the fair market !alue of the asset at the time the lease is signed

2. ' company sells an office building that has appreciated in !alue and subse-uently leasesthe space. ;hich of the following scenarios represents an impact that sale4leasebacks mayha!e on corporate financial statements6 (B)

(') =ower total income will be reali%ed in the year of sale because of capital gains ta*(B) igher ta*able income will be reali%ed in the year of sale because of a gain on sale(8) :arnings per share increases because the mortgage has been paid off (9) igher ta*able income will be reali%ed because lease payments cannot be deducted

21. ;hich of the following does 37T represent a potential benefit of selling and leasing back a

property6 (9)

(') Aro!ides a source of capital(B) @eturns e*cess capital to in!estors(8) 9emonstrates the !alue of the real estate to the marketplace(9) ncreases the firms depreciation deductions

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22. The cash flows considered in a sale4leaseback analysis are? (8)

(') Aurchase price, differences in operating e*penses o!er the holding period, and cashflow from future sale

(B) Aurchase price, lease payments, and cash flow from future sale(8) 8ash flow from sale, differences in future cash flow from operations, and potential cash

flow from future sale(9) 8ash flow from sale, future lease payments, and differences in future operating

e*penses

2$. The cash flows considered in a lease !ersus own analysis are? (')

(') Aurchase price, difference in cash flow from operations o!er the holding period, andcash flow from sale

(B) Aurchase price, lease payments, and cash flow from future sale(8) 8ash flow from sale, differences in future operating e*penses, and cash flow from future

sale(9) 8ash flow from sale, future lease payments, and differences in future operating

e*penses

2&. 'll other factors being e-ual, a company would prefer to own rather than lease under whichof the following conditions6 (9)

(') The e*pected life of an asset far e*ceeds the companys pro0ected period of use(B) The real estate in!estment represents a large proportion of the companys total capital(8) The corporate needs for the property are not highly sensiti!e to the le!el of maintenance(9) The corporation needs a speciali%ed research and de!elopment building

2+. ;hich of the following could be affected if a corporation ac-uires a parcel of real estate6 (9)

(') :arnings per share ratio(B) 8orporate li-uidity(8) 8orporate risk(9) 'll of the abo!e

2. t is estimated that corporate users control as much as CCC percent of all commercial realestate. (8)

(') 1(B) 2+(8) +(9) 1

2. ;hen doing a sale !ersus lease analysis, how should the residual !alue of the property beestimated6 (9)

(') 'ssume it is worthless(B) /et it e-ual to the book !alue of the property(8) 'ssume it is e-ual to the original purchase price(9) 'ssume it is e-ual to the market !alue of the real estate

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2. ;hich of the following statements is T@D: for a corporation with a high credit ratingconsidering owning !ersus leasing corporate real estate6 (B)

(') The company should probably use a mortgage(B) The company can probably issue corporate debt at a more fa!orable rate(8) The company is probably better off leasing the property from someone with a lower

credit rating(9) The companys credit rating does not effect the own !ersus lease decision

25. ;hich of the following statements is F'=/: regarding operating leases6 (')

(') They are recorded as present !alue of lease on the balance sheet(B) They do not ha!e any real effect the balance sheet(8) They must not e*tend for at least + percent of the assets life(9) They are usually the preferred form of accounting for leases

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Bf14e Tb Ch15