In today’s capital-intensive environment, financial agility is everything. For CFOs and business owners, reducing the Weighted Average Cost of Capital (WACC) is a strategic lever to unlock enterprise value, drive investments, and improve shareholder confidence. While companies often look at lowering the cost of equity or renegotiating debt, Operating Leasing remains an underutilized yet powerful tool to improve WACC — without increasing financial risk.
What Is WACC and Why It Matters
WACC represents the average rate of return a company is expected to pay its stakeholders — both debt holders and equity investors — for using their capital. It is calculated as:
WACC = (E/V × Re) + (D/V × Rd × (1 – Tc))
Where:
– E = Market value of equity
– D = Market value of debt
– V = E + D (Total capital)
– Re = Cost of equity
– Rd = Cost of debt
– Tc = Corporate tax rate
Lowering WACC enables a company to undertake more projects, raise its valuation, and reduce the hurdle rate for investment.
Why Leasing Plays a Strategic Role
Traditionally, businesses fund CapEx through term loans or equity. Both options impact WACC:
- Debt increases leverage and pressure on interest coverage ratios.
- Equity dilutes ownership and typically comes at a higher cost than debt.
Here’s where Operating Lease steps in.
It allows a company to:
- Access capital assets without debt on the balance sheet.
- Deduct lease rentals 100% from P&L, reducing taxable income and improving post-tax earnings.
- Preserve debt headroom for more strategic borrowing when needed.
- Avoid equity dilution, especially important for promoter-led or privately held firms.
By structuring asset financing as an operating lease, companies reduce their overall capital base (V) in the WACC formula — making the capital structure lighter, leaner, and more tax efficient.
How Leasing Impacts WACC Components
1. Reduces Cost of Equity (Re)
- A strong balance sheet with low debt improves investor confidence.
- Better ROA/ROCE from lease-enabled CapEx improves shareholder returns.
- Leasing ensures predictable expenses and future cash flows — lowering perceived risk and volatility.
Result: Lower required return on equity from investors.
2. Maintains or Lowers Cost of Debt (Rd)
- Leasing does not appear as traditional debt, hence does not bloat the liabilities.
- Companies can continue raising debt at competitive rates as their leverage ratios (Debt-to-Equity, TOL/TNW) remain favorable.
- Future debt becomes cheaper due to improved credit profile.
Result: Preserved or enhanced creditworthiness leading to lower borrowing costs.
3. Reduces Overall Capital Requirement (V)
- No upfront equity or long-term loan needed for CapEx.
- The “capital” needed for asset acquisition is substituted by lease payments.
- Lower capital base increases capital efficiency metrics.
Result: WACC is driven down by reducing denominator (V) and improving numerator (cost weights).
Illustrative Example
Imagine a mid-sized company with:
– ₹10 Cr equity at 15% cost
– ₹10 Cr debt at 10% cost
– 25% tax rate
WACC = (0.5 × 15%) + (0.5 × 10% × (1 – 0.25)) = 7.5% + 3.75% = 11.25%
Now, if ₹5 Cr CapEx is instead financed via lease:
– No increase in debt or equity
– Cost of capital doesn’t rise
– Lease rentals are fully expensed
– Future ROA and ROCE improve due to better capital productivity
→ Net Result: WACC stays lower and asset acquisition is achieved efficiently.
Final Takeaway
High-growth companies today need smarter financing—not just cheaper money. Operating Leasing helps you acquire assets, preserve borrowing limits, enhance tax efficiency, and lower your WACC — all while keeping your balance sheet clean.
Whether you’re planning expansion, investing in green energy, upgrading tech, or scaling manufacturing, leasing helps you do more with less capital.
✅ Lower WACC = Higher Valuation + Greater Investment Capacity + Financial Flexibility
