Chapter 25, Problem 2PS

Reasons for leasing Some of the following reasons for leasing are rational. Others are irrational or assume imperfect or inefficient capital markets. Which of the following reasons are the rational ones?

1. a. The lessee’s, need for the leased asset is only temporary.
2. b. Specialized lessors are better able to bear the risk of obsolescence.
3. c. Leasing provides 100% financing and thus preserves capital.
4. d. Leasing allows firms with low marginal tax rates to “sell” depreciation tax shields.
5. e. Leasing increases earnings per share.
6. f. Leasing reduces the transaction cost of obtaining external financing.
7. g. Leasing avoids restrictions on capital expenditures.
8. h. Leasing is attractive when interest payments exceed 30% of EBITDA and there are no interest tax shields from additional borrowing.