A lessee most likely has an incentive to structure a lease as an operating lease rather than a finance lease when it: A. does not have debt covenants. B. has a high debt-to-equity ratio. C. is very profitable.
A firm with a high debt-to-equity ratio is more likely to use an operating lease instead of a capital lease. Use of an operating lease avoids the recognition of debt on the lessee’s balance sheet and will not increase the debt-to-equity ratio.
