A firm is considering leasing. The firm can borrow at 9 percent, and the marginal corporate tax rate is 21 percent. What is the discount rate for valuing the lease?

Question

Quizplus · Accepted Answer

The discount rate formula for leasing is: 
Discount rate = after-tax borrowing rate / (1 - tax rate). 
Plug in the given values: 
Discount rate = 0.09 / (1 - 0.21) = 0.1139 or 11.39%. 
Therefore, the discount rate for valuing the lease is 7.11% (rounded to two decimal places). 
Hence, the correct answer is D.

A Firm Is Considering Leasing