Which of the Following Statements Is False

question 6

Multiple Choice

Which of the following statements is false?

• A) Lease payments are a fixed obligation of the firm.
• B) The risk of the lease payments is no greater than the risk of secured debt, so it is reasonable to discount the lease payments at the firm's secured borrowing rate.
• C) If a firm purchases a piece of equipment, the expense is a capital expenditure. Therefore, the purchase price can be depreciated over time, generating a depreciation tax shield.
• D) If the equipment is leased and the lease is a non-tax lease, there is no capital expenditure, but the lease payments are an operating expense.

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Definitions:

Annual Operating Costs

The total expenses associated with running a business or operating a piece of equipment over one year.

Equivalent Annual Cost

A financial analysis tool used to compare the cost efficiency of two or more investments or projects with different lifespans by normalizing their costs on an annual basis.

Operating Cash Flow

Operating cash flow represents the cash generated by a company's regular business operations, reflecting its ability to generate sufficient positive cash flow to maintain and grow its operations.