The relevant discount rate for evaluating a lease is the ﬁrm's:
A) Cost of equity ﬁnancing.
B) Pre-tax cost of borrowing.
C) After-tax cost of borrowing.
D) Cost of working capital.
E) Rate of return on short-term assets.

Question

Quizplus · Accepted Answer

The relevant discount rate for evaluating a lease is the after-tax cost of borrowing because a lease is essentially a form of borrowing. The after-tax cost of borrowing takes into account the tax benefits of debt financing, which can lower the cost of financing for the firm. The cost of equity financing (A) is not relevant because leasing does not involve equity financing. The pre-tax cost of borrowing (B) does not take into account the tax benefits of borrowing, and therefore is not the most appropriate discount rate. The cost of working capital (D) and rate of return on short-term assets (E) are not relevant to evaluating a lease.

The Relevant Discount Rate for Evaluating a Lease Is the ﬁRm's