Firms that use ﬁnancial leases must consider their debt-to-equity ratios as inadequate measures of ﬁnancial leverage because:
A)lenders are concerned about the ﬁrm's total liabilities and related cash ﬂow.
B)debt displacement occurs with leasing.
C)less future debt can be raised for a growing ﬁrm when a lease is used.
D)the liability equals to the present value of all future lease payments.
E)All of the above.

Question

Quizplus · Accepted Answer

A) Lenders are concerned about the firm's total liabilities and related cash flow, which includes lease payments.
B) Debt displacement occurs with leasing, where lease payments replace traditional forms of debt financing.
C) Less future debt can be raised for a growing firm when a lease is used since lease obligations count as debt and can limit a firm's borrowing capacity.
D) The liability for a financial lease equals the present value of all future payments, which must be considered in calculating a firm's leverage.

Therefore, all of the above options must be taken into account when considering the debt-to-equity ratio for firms that use financial leases.

Firms That Use ﬁNancial Leases Must Consider Their Debt-To-Equity Ratios