A Lease-Versus-Purchase Analysis Should Compare the Cost of Leasing to the Cost

question 10

Multiple Choice

A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning,assuming that the asset purchased

• A) is financed with short-term debt.
• B) is financed with long-term debt.
• C) is financed with debt whose maturity matches the term of the lease.
• D) is financed with a mix of debt and equity based on the firm's target capital structure,i.e. ,at the WACC.
• E) is financed with retained earnings.

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Definitions:

Levered Beta

A measurement of the volatility of a stock, including the impact of the company's debt, relative to the market as a whole.

Unlevered Beta

A measure of how much the stock of a company is expected to move if the stock market moves 1 point, without considering the company's debt.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity.

Variable Cost

Variable Cost refers to expenses that change directly and proportionally with the level of production or sales activity, such as raw materials and direct labor costs.