Debt displacement is associated with leases because:
A)all assets not purchased with equity use debt ﬁnancing.
B)debt is always a cheaper source of ﬁnancing and preferred to equity ﬁnancing.
C)IFRS and tax authorities mandate debt displacement.
D)lease ﬁnancing is all debt and causes an imbalance in the optimal debt to equity ratio which
Reduces future debt ﬁnancing.
E)None of the above.

Question

Quizplus · Accepted Answer

Debt displacement refers to the idea that leasing an asset with a lease agreement that is structured like debt can displace borrowing that might have been done to purchase the asset outright. Since lease financing is debt financing, it can result in an imbalance in the optimal debt to equity ratio, which can reduce future debt financing options. Therefore, option D is the correct answer. The other options are incorrect as they do not fully explain the concept of debt displacement in leasing.

Debt Displacement Is Associated with Leases Because