CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which one of the following statements regarding the effect of leases on financial ratios (in early years) is CORRECT?
A. Under a capital lease, ROE is generally higher.
B. Under an operating lease, interest coverage ratios are generally higher.
C. Under an operating lease, leverage ratios are higher.
Explanation: Under a capital lease, the lease payment is split into interest and lease amortization components. Explicit recognition of interest raises the total interest amount, which lowers interest coverage ratios. EBIT is unaffected.

User Contributed Comments 6

User Comment
iceluke interest expense is lower with operating lease p. 951 and so the ratio (net income / interest expense) is higher.
cahiz84 ROE is higher with capital leases in later years
mishis an operating lease generates CFO not an i expense iceluke.
teje Isn't EBIT lower under operating lease because the lease payment is deducted from EBIT, whereas under capital lease only the depreciation expense is deducted from EBIT.

However, the interest payments on the capital lease will increase the I guess there implying that the interest payment has a more dominate effect over the EBIT effect.
Sheeb EBIT is lower under Operating leases, therefore:
EBIT/Interest PMTs should also be lower.
mali97 how about u mention lesseee or lessor
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