A lease versus purchase analysis should compare the cost of leasing to the cost

Question

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

is financed with long-term debt.

is financed with debt whose maturity matches the term of the lease.

is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.

is financed with retained earnings.

is financed with short-term debt.

a.

is financed with long-term debt.

b.

is financed with debt whose maturity matches the term of the lease.

c.

is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.

d.

is financed with retained earnings.

e.

is financed with short-term debt.

Explanation / Answer

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

a.

is financed with long-term debt.

Ans

b.

is financed with debt whose maturity matches the term of the lease.

c.

is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.

d.

is financed with retained earnings.

e.

is financed with short-term debt.

Explanation: Analysis true return of lease /purchase can be analyzed only treating source of finance as outside money preferably debt and matching its maturity with duration of lease to make it comparable.

a.

is financed with long-term debt.

Ans

b.

is financed with debt whose maturity matches the term of the lease.

c.

is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.

d.

is financed with retained earnings.

e.

is financed with short-term debt.

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