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    Characteristics of Leasing

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    Discuss the validity of each of the following statements.

    a. Leasing reduces risk and can reduce a firm's cost of capital

    b. Leasing provides 100-percent financing.

    c. Firms that do a large amount of leasing will not do much borrowing.

    d. If the tax advantages of leasing were eliminated, leasing would disappear.

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    Solution Preview

    a. Leasing reduces risk and can reduce a firm's cost of capital :

    Essentially, a lease is a rental agreement in which one party (the lessor) maintains ownership of an asset and another party (the lessee) uses it in its business activities. In today's world, most leases are. The first step is to decide what equipment you may want to own "forever" and what might be more practical to lease. If you do this objectively, you will probably find a relatively small pool of "must own" stuff. For example, many people are surprised to learn that the major US airlines lease most of their aircraft. The airlines have decided to save their cash and borrowing power for operating requirements. A leasing contract can be tailored to meet the needs of any business. Through leasing, a business can ...

    Solution Summary

    Solution discusses the characteristics and benefits of leasing versus buying.

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