A Firm Under Financial Stress May Suffer from Debt Overhang

A firm under financial stress may suffer from debt overhang whereby new profitable capital projects may not be pursued. Leasing may allow the firm to proceed with these projects because

A) the lease will separate the assets related to the new investment thereby negating the claim from existing bondholders on these assets.
B) the lease will carry a lower rate of return than would be the case if the new assets were financed using debt.
C) the lease will carry a lower rate of return than would be the case if the new assets were financed using equity.
D) since the leaseholders carry a lower seniority than existing bondholders, lease financing cannot be used to avoid the problem of debt overhang.