Short Essay Questions 1.Branson Incorporated is considering leasing equipment. It can either lease the equipment for five or ten years. The five-year lease allows Branson to classify the lease as an...

Short Essay Questions

1.Branson Incorporated is considering leasing equipment. It can either lease the equipment for five or ten years. The five-year lease allows Branson to classify the lease as an operating lease. However, the ten-year lease requires Branson to classify the lease as a capital lease. Branson is operating under a debt covenant that sets a maximum on its debt/equity ratio. If Branson is close to violating this debt covenant, which lease contract would you advise Branson to sign? Why?

2.Felton Incorporated is considering leasing equipment. It can either lease that equipment for five or ten years with the same annual lease payments under either agreement. The five-year lease allows Felton to classify the lease as an operating lease. However, the ten-year lease requires Felton to classify the lease as a capital lease. If Felton desires to measure net income higher in the initial year of the lease agreement, which lease contract would you advise Felton to sign? Why?

3.Distinguish between an installment obligation and a non-interest-bearing obligation.

4.How do debt covenants impact a company's financial position?

5.What is the risk premium of a bond issue and what role does it play in the determination of bond prices?