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$3.00 What are the consequences to a firm of having all their leases as capital leases? What happens from a debt equity ratio

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  • Due on Jun. 24, 2012
  • Asked on Jun. 21, 2012 at 08:39:05AM
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saosan
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What are the consequences to a firm of having all their leases as capital leases?  What happens from a debt equity ratio point of view and how would that affect the financing of the firm?

 

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  • Posted on Jun. 21, 2012 at 09:15:51AM
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elvin
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Preview: ... on beta is determined by stock returns, which should be more volatile, if a firm has larger fixed commitments (like leases), no matter what the accounting treatment of theleases may be. The ratings agencies consider the magnitude of fixed charges, when assigning ratings to a company. That does not mean, however, that using regression betas and ratings will yield the right answers. Ratings agencies can make mistakes and thelease commitment of a firm may have become more or less onerous over time, thus skewing regression betas. If the cost of equity is estimated using sector-average or bottom-up betas and the cost of debt from synthetic ratings, then the way we treat operating leases can affect our estimates. Earlier in the paper ...
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