Reference no: EM131502369

Leasing companies purchase capital equipment, like airplanes or trucks, and then lease the equipment to the firms that actually use them. On its face, it is hard to see why this is a wealth-creating transaction since the end users could borrow money and purchase their own equipment. The answer is that banks, due to the way they are regulated, are more willing to lend to companies with less debt. By leasing equipment, a company moves debt off its balance sheet, which makes it easier to borrow more heavily. The enhanced borrowing ability of low-debt companies makes leasing more valuable than borrowing and buying.

In the fall of 2015, one such truck leasing company was having trouble making money. The company purchased over-the-road trucks for $92,000 and then leased them to various transport companies, ranging from small owner-operators to large publicly owned firms with fleets of over hundred trucks. Salespeople who negotiated the leases were paid a commission of $2,000 for every truck they leased.

Question: Why is the leasing company losing money, and how do we fix it?