The risk of cash flow associated with the lease payment and the depreciation shield are:
A) different for taxable firms and the depreciation shield should be discounted at a higher riskier rate.
B) different for taxable firms and the depreciation shield should be discounted at a lower riskless rate.
C) the same and should be discounted at the same rate.
D) dependent on the amount of debt displaced, therefore the discount rate may vary for both.

Question

Quizplus · Accepted Answer

The risk of cash flow associated with the lease payment is different for taxable firms because the lease payment is not tax-deductible. The depreciation shield is also different for taxable firms because it is only available to firms that own the asset. The depreciation shield should be discounted at a higher riskier rate because it is less certain than the lease payment.

The Risk of Cash Flow Associated with the Lease Payment