How can one measure the benefits of leasing versus owning and borrowing?
A company must maintain debt-equity ratios or risk a credit downgrade for excess borrowings. Since no company has unlimited debt capacity, additional debt must be matched on a pro-rata basis with additional equity. The benefits of leasing (freeing up debt and equity for the core business) versus owning (tying up debt and equity on the balance sheet) should be measured based upon the company’s weighted average cost of capital, not at its corporate debt rate.
