The CFO of Alberta Country Record Company has decided to use leases because this will result in the firm reporting higher net income and lower debt ratios.He feels this will reduce the cost of debt for the firm thereby increasing the value of the firm.If the market is efficient then his statement
A)is a valid reason to use leases.
B)is not a valid reason to use leases.
C)is incorrect as the firm's cash flows and associated risks are unaffected.
D)b & c.

Question

Quizplus · Accepted Answer

The CFO's statement is not a valid reason to use leases because in an efficient market, investors see through the accounting treatments and focus on the firm's cash flows and risks, which are unaffected by the decision to lease or buy. Therefore, the choice of leasing over buying, solely for the purpose of improving financial ratios, would not fool the market or reduce the cost of debt in an efficient market.

The CFO of Alberta Country Record Company Has Decided to Use