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 these.

Question

Quizplus · Accepted Answer

Debt displacement refers to the situation where a lease transaction results in an imbalance in the optimal debt to equity ratio of a firm. Since lease financing is a form of debt financing, it can displace other debt financing that the firm may have been able to obtain in the absence of the lease. This can reduce the firm's future debt capacity and affect its ability to finance future growth. Therefore, choice D is the correct answer.

Debt Displacement Is Associated with Leases Because