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Leasing and the Cost of Capital

Published online by Cambridge University Press:  19 October 2009

Michael S. Long
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Extract

In recent financial literature a large volume of the articles dealt with asset leasing. This author and his colleagues [6] and others [7] developed the conditions under which asset leasing cannot increase the overall firm's value over normal debt leverage. Many others [2, 3, 11] analyzed the “lease-buy” decision using a variety of models and assumptions. None, however, considered the effect of asset leasing on the firm's capitalization rate. While asset leasing per se would not affect the firm's unlevered cost of capital, it should affect its estimation. This paper developed the adjustment factor to obtain the firm's corresponding unlevered cost of capital with leasing leverage. Basically, Modigliani and Miller's methodology [9] was adjusted for the different tax situation with asset leasing. The effective benefit of leasing on the firm's average cost of funds was shown to be not nearly as effective as an equivalent amount of ordinary debt.

Type
Proceedings of 1977 Western Finance Association Meeting: Selected Conference Papers
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 4 , November 1977 , pp. 579 - 586
Copyright
Copyright © School of Business Administration, University of Washington 1977

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References

REFERENCES

[1]Ezzell, J. R., and Porter, R. Burr. “Flotation Costs and the Weighted Average Cost of Capital.” Journal of Financial and Quantitative Analysis (September 1976), pp. 403–413.Google Scholar
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