A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchase <\/p>\n\n\n\n
a. is financed with short-term debt. <\/p>\n\n\n\n
b. is financed with retained earnings. <\/p>\n\n\n\n
c. is financed with long-term debt. <\/p>\n\n\n\n
d. is financed with a mix of debt and equity based on the firm’s target capital structure, i.e., at the W <\/p>\n\n\n\n
e. is financed with debt whose maturity matches the term of the lease.<\/p>\n\n\n\n
The correct answer and explanation is:<\/mark><\/strong><\/p>\n\n\n\n The correct answer is d. is financed with a mix of debt and equity based on the firm’s target capital structure, i.e., at the WACC (Weighted Average Cost of Capital)<\/strong>.<\/p>\n\n\n\n In a lease versus purchase analysis, the goal is to compare the total costs of leasing an asset with the total costs of owning it. To make this comparison, it is important to consider how the asset would be financed if purchased. The appropriate financing structure should reflect the firm’s overall cost of capital, which is the mix of debt and equity financing used to fund its operations.<\/p>\n\n\n\n The WACC<\/strong> represents the weighted average of the cost of debt and equity, adjusted for the firm\u2019s capital structure. Since companies generally use both debt and equity to finance their investments, this mixed approach ensures that the costs associated with both financing sources are incorporated into the analysis. When evaluating ownership, the cost of financing through debt and equity will impact the total cost of ownership, including interest payments on debt, return expectations for equity holders, and the potential for tax benefits from interest deductions.<\/p>\n\n\n\n On the other hand, if the asset is financed through short-term debt (a)<\/strong> or retained earnings (b)<\/strong>, the financing structure would not reflect the company’s target capital structure, potentially distorting the analysis. Financing with long-term debt (c)<\/strong> or debt matching the lease term (e)<\/strong> may provide partial insights, but they still don\u2019t take into account the full capital structure of the firm, as the mix of debt and equity plays a crucial role in determining the total cost of ownership.<\/p>\n\n\n\n Therefore, comparing leasing costs to the costs of ownership based on the company\u2019s target capital structure (WACC) provides a more accurate representation of the total financial impact of owning versus leasing an asset.<\/p>\n","protected":false},"excerpt":{"rendered":" A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchase a. is financed with short-term debt. b. is financed with retained earnings. c. is financed with long-term debt. d. is financed with a mix of debt and equity based on the firm’s target capital […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center 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