Please edit, rephrase or add something to the following part of my report. Question:Whether debt funding...

Please edit, rephrase or add something to the following part of my report.

Question:Whether debt funding would be desirable, or even possible for the new equipment required should the company decide to pursue aggressive expansion – noting that the equipment used by the business is quite specialised and cannot easily be sold and taken to another company.

Answer:Debt funding is not adviseable as these assets are specialised and resale would not be easy .An Operating lease option would be preferred , so that the company does not increase its debt equity leverage, or interest on loan charge but only the lease expenses with the right to return the asset upon completion of the project.

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Expert Solution

operating lease is preferred over debt funding because debt funding can increase the liability of the firm and interest payments have to be made on the portion of debt issued,also due to the equipments being specialized in nature ,selling of these assets become difficult.

instead the company can go for operating leases, if the company would have directly purchased the equipment with the help of debt then as asset will be recorded in the balance sheet and liabilities will increase and along with it the associated interest expense which will also reduce our net income and available cash.

but in case of operating leases , the company can get tax benefits for leasing as it can deduct the payments as operating expenses,but with the purchase of asset we get deductions for tax and depreciation expense of the asset.the lessee will also be returning the asset after the completion of the lease period. therefore, the ownership of the asset also remains with the company. the risks associated with the equipment is also borne by the lessor.

jeff jeffy answered 1 year ago

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