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)FASB 13 and the IRS 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 occurs when lease financing is considered as debt and is included in the debt-to-equity ratio calculation, which could negatively affect the company's ability to acquire future debt financing. Thus, when a company leases assets, it increases the amount of debt on its balance sheet, which could lead to an imbalance in the optimal debt-to-equity ratio.

Debt Displacement Is Associated with Leases Because