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Does leasing increase borrowing capacity of a firm? How?
Yes, leasing increases borrowing capacity of a firm. For example, if a company at present has a 1:1 debt equity ratio and wants to acquire fixed assets then it can purchase it outright by financing the same out of debt capital in which case the debt equity ratio will be 2:1 which will mean reduced borrowing capacity of the company. On contrary, if the company decides to purchase these assets on lease, its debt equity ratio will remain unaffected as it gets only the right to use d the assets and not the ownership of the assets which indicated increased borrowing capacity of the company.
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