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    Lease or buy? What is 'capital structure'?

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    1. How should you determine whether to lease an asset or buy it outright.

    2. What is meant by company's "capital Structure"? Which is the correct one?

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    Solution Preview

    Whether a company leases or buys an asset is dependent on circumstances. There is no definitive yes-no answer for this question. Some of the factors that could impact the decision are:

    1. Is the asset one that will become technologically obsolete in the short term?
    2. Is the asset needed for a particular job or product line that may not continue (such as fad products)?
    3. Buying the asset and recording debt could change liquidity and profitability ratios substantially and possibly effect banking relations
    4. If a publicly traded company, the price of stock could be impacted by new debt.
    5. The financing may be too expensive whereas leasing costs are less, leasing might be more expensive than longer term financing.
    6. Leasing does not usually require the initial cash outlay that purchasing does.
    7. With a true lease, the company will not have to deal with sale or other disposal costs when the usefulness of the asset is done.
    8. CPAs can apply capital budgeting techniques which may be a determining factor.
    9. Tax consequences should be considered.
    10. Leasing can ...

    Solution Summary

    The 678 word solution gives a list of 10 factors which could impact reasons to buy or to lease. There are several paragraphs which discuss types of capital as part of the structure of an entity following by a quoted and cited article containing valuable data on capital structure..