Question

The appropriate discount rate for valuing a financial lease is:

A. the firm's after-tax weighted average cost of capital
B. the after-tax cost of secured borrowing.
C. the before tax cost of borrowing

Answer 1

The appropriate discount rate for valuing a financial lease is the after-tax cost of secured borrowing, as it mirrors the realistic cost of capital for the duration of the lease in question.

Step-by-step explanation:

The appropriate discount rate for valuing a financial lease is typically the after-tax cost of secured borrowing. This rate is used because it closely reflects the rate at which the lessee can borrow funds for the duration of the lease, making it a realistic cost of capital for the lease in question. It takes into account the risk level of the lease obligation, which is often secured and thus may be financed at a rate that is lower than the firm's weighted average cost of capital (WACC).