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

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

c. is financed with retained earnings.

d. is financed with short-term debt.

e. is financed with long-term debt.

Question

Addison Brennan

Business

19 June, 20:03

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

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

c. is financed with retained earnings.

d. is financed with short-term debt.

e. is financed with long-term debt.

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Answers (1)

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Sunny · Answer 1

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

Explanation:

When the company has the WACC defined, this rate is the reference to take decision over any spend of capital, when the company make an investment it compare the rate of return of each project to this discount rate.

In this case the relative cost of lease must be equal or less than the WACC if not the lease is not an option.

On the other hand, the option of WACC it's necessary because the company must keep the capital structure as before the asset's purchase