A firm is considering leasing.The firm can borrow at 9 percent, and the marginal corporate tax rate is 30 percent.What is the discount rate for valuing the lease?

Question

Quizplus · Accepted Answer

To find the discount rate for valuing the lease, we need to adjust the firm's borrowing rate by taking into account the tax benefits of leasing. 
The after-tax cost of borrowing = borrowing rate * (1 - tax rate) = 9% * (1 - 30%) = 6.3%
Therefore, the discount rate for valuing the lease is 6.3%. 
Option A is incorrect because it only considers the borrowing rate and does not account for the tax benefits of leasing. 
Option B is incorrect because it only considers the tax rate and not the borrowing rate. 
Option C is incorrect because it calculates the before-tax cost of borrowing instead of the after-tax cost.

A Firm Is Considering Leasing