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

Question

Quizplus · Accepted Answer

The aftertax cost of borrowing is the most relevant discount rate for evaluating a lease because it reflects the cost of financing the lease through debt, which is a common method of financing leases. The aftertax cost of borrowing takes into account the tax benefits of deducting interest payments from taxable income. The cost of equity financing and the rate of return on short-term assets are not relevant because they do not reflect the cost of financing the lease through debt. The pre-tax cost of borrowing is also not as relevant as the aftertax cost of borrowing because it does not take into account the tax benefits of deducting interest payments. The cost of working capital is not relevant for evaluating a lease because it is a measure of the company's liquidity, not its cost of financing.

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