Historically, leasing was often referred to as off-balance-s…

Historically, leasing was often referred to as off-balance-sheet financing because lease payments were shown as operating expenses on a firm’s income statement, and leased assets and associated liabilities did not appear on the firm’s balance sheet  under certain conditions.

Consider two companies A and B with the same capital structu…

Consider two companies A and B with the same capital structure, company A has relatively stable sales and low operating stress, company B has relatively volatile sales and high operating leverage. In addtion, company A is subject to a higher tax rate than company B. Which company should increase its debt ratio? Why?