Question

Which one of these is considered to be the best reason for obtaining a capital lease?

Multiple Choice

• To benefit from the implicit interest rate of a lease

• To extend payments over a period of time

• To avoid the restrictive covenants often found in loan agreements

• To reduce the liabilities shown on the firm's balance sheet

• To obtain 100 percent financing

Answer 1

The correct option is -  To obtain 100 percent financing. Capital leases by definition finance more than 90% of the asset value. As there is usually no down payment required, most capital leases effectively give 100% financing.

Option 1 is incorrect - The implicit interest rate could be higher than a loan interest rate

Option 2 is incorrect - Operating leases also extend payments over a period of time

Option 3 is incorrect - Capital leases also have restrictive covenants

Option 4 is incorrect - Capital leases also have to be reported as liabilities