Taking an asset on lease in place of buying it outright reduces the funds required to be invested in fixed assets. Such a strategy is specially suitable for ______.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → high risk lines of business
Option (1) firms with a strong cash flow position — Incorrect. A strong cash flow position is a factor in the financing decision. It makes debt financing more workable than equity, and it has no link with leasing.
Option (2) companies having stable earnings — Incorrect. Stable earnings are a factor in the dividend decision. A company with stable earnings is in a better position to declare higher dividends. It has nothing to do with whether a firm should lease an asset or buy it.
Option (3) high risk lines of business — Correct. Under leasing, the firm pays lease rentals and uses the asset without buying it. It avoids the huge sums needed to buy the asset, so less money is locked in fixed assets. In a high risk business, the firm may not be able to use an asset for long, so it is better not to lock huge sums in buying it. So leasing is specially suitable in high risk lines of business.
Option (4) organisations operating at a lower scale — Incorrect. A firm too small to use a facility fully can share it with other firms. That is level of collaboration, another way to cut the investment in fixed assets.
NCERT (2026-27 Edition): “7. Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it. Availability of leasing facilities, thus, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of business.” “8. Level of Collaboration: At times, certain business organisations share each other’s facilities. For example, a bank may use another’s ATM or some of them may jointly establish a particular facility. This is feasible if the scale of operations of each one of them is not sufficient to make full use of the facility. Such collaboration reduces the level of investment in fixed assets for each one of the participating organisations.” |