You are the CEO of a company. Your CFO is concerned about certain covenants in your debt agreement that specify a maximum ratio of liabilities to stockholders' equity. He proposes to structure your leases as "operating" so as to avoid capitalization. In order to do so, he proposes to structure the lease with an initial term of five years, and with three five-year renewal options instead of a flat 20 -year lease. That way, the lease term will not exceed \(75 \%\) of the useful life of the leased assets, and the present value of the lease payments will not exceed \(90 \%\) of the fair market value of the leased assets. The CFO explains that these two requirements usually trigger lease capitalization. He asks for your input into this decision.

a. What are the management issues that you feel are relevant for this decision? That is, how might this lease structure impact your company?

\(b\). What are the ethical issues that are raised by the CFO's proposal? Explain.