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Chapter 21:   Term Loans and Leases

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1. Term financing is short-term debt, typically used to purchase short-term assets (such as seasonal inventories) that tend to be self-liquidating.

2. All other things equal, the interest rate on a term loan is higher than the rate on a short-term loan.

3. The before-tax cost of debt is lower than the after-tax cost of debt because taxes add an additional burden over and above interest payments.

4. In a sale and leaseback arrangement, the seller is the lessee and the buyer is the lessor.

5. Under a conditional sales contract, the title passes to the buyer when the first installment payment is made.

6. The minimum working-capital requirement is probably the most commonly used loan covenant in a loan agreement.

7. A term loan agreement containing a prepayment penalty clause is more likely to have an insurance company rather than a bank as the lender.

8. A lender in a chattel mortgage contract is forbidden to sell the movable property when the borrower defaults.

9. Renting a car for a week through Jack's Rent-a-Lemon is an example of a financial lease.

10. The discount rate to be used in evaluating lease financing versus debt financing is the firm's overall cost of capital.

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