A firm seeing to acquire an asset essential to its operations can either buy the

Question

A firm seeing to acquire an asset essential to its operations can either buy the asset or lease it. A company may argue that leasing versus purchasing allows it to borrow less money, yet the reality is that failure to make a lease payment will result in the loss of use of the asset just as assuredly as not paying the interest on debt. No different from buying versus leasing a car; if you don’t pay, the asset goes away.

That being said, leasing provides some benefits to the lessee. Which of the following are advantages to using operating leases:

Select one:

a. Company may only need use of the asset for a period of time.

b. Loss making firms that cannot benefit from the tax benefits of buying (depreciation, interest expense) are more likely to lease.

c. Tax policy can drive mutual advantages. For example, in the 1970’s, when U.S. citizens were facing confiscatory marginal tax rates of as high as 70% or more, the investor/capital provider would purchase an asset, obtain the tax benefits of the depreciation on the asset, and then lease it to the entity with the lower marginal tax rate.

d. All of the above

Explanation / Answer

d. All of the above

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