medium · Principles of Finance
An analyst is comparing two firms. Firm A leases its equipment (Operating Leases), while Firm B buys its equipment (CapEx).
Which firm will likely have a higher 'Cash Flow from Operations' (CFO), and why?
- Firm A, because leasing preserves cash and therefore increases operating cash flow.
- Firm B, because CapEx is reported in Investing Activities while Lease Payments reduce CFO.
- Both will be identical because FCF is independent of the 'lease vs. buy' decision.
- Firm B, because depreciation is a larger add-back than lease expense.
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