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Lease versus purchase, components of capital structure

1. Under which circumstances would you lease versus purchase? What are the criteria that you would use to make this decision? What is the financial influence of this decision?

2. What are the components of the capital structure? What are the differences of these components? How do you determine the optimal mix of the components of the capital structure?

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1. Under which circumstances would you lease versus purchase? What are the criteria that you would use to make this decision? What is the financial influence of this decision?

I would lease rather than purchase under a few conditions. The criteria would be that either the lease permits flexibility, extends opportunity, or is cheaper. Here are six scenarios:

FLEXIBILITY

Concerned about obsolescence. If I thought the asset would be obsolete soon, I would rather lease it than buy it and have to figure out what to do with it when it is no longer useful.

Need is temporary. If I just need the asset for a short time, due to surge in orders or temporary situation, I would rather lease.

OPPORTUNITY

Unique so difficult to maintain or insure. Some assets require specialty work or are hard to insure and so leasing permits you to keep the risk of loss and maintenance with the lessor. Like coal mining equipment!

Capital is ...

Solution Summary

Your tutorial is 598 words (no references, just my thoughts) and gives six reasons for leasing rather than buying, the impact of lease vs. buy in the income statement and balance sheet and how to determine the optimal mix of capital.

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