Which of the following discount rates should be used for the lease versus borrow decision?
A) the risk-free rate of interest
B) the company's cost of borrowing
C) the company's after-tax cost of borrowing
D) the company's weighted average cost of capital

Question

Quizplus · Accepted Answer

The most appropriate discount rate for the lease versus borrow decision is the company's after-tax cost of borrowing as it takes into account the tax benefits of interest expense. The risk-free rate is not relevant for this decision as it does not reflect the company's specific situation. The company's cost of borrowing may not reflect the tax benefits and is therefore less accurate than the after-tax cost of borrowing. The company's weighted average cost of capital includes the cost of equity, which is not relevant in this decision.

Which of the Following Discount Rates Should Be Used for the Lease