A Company with a Tax Rate of 25% Is Planning

question 139

Multiple Choice

A company with a tax rate of 25% is planning to acquire a $100 000 asset that has a 30% CCA rate.The company may purchase the asset or lease it. The cost of borrowing is 9%. The prospectivelessor has a 40% tax rate and a 6% cost of capital. Which of the following statements is correct about the present value of the tax shield on the CCA to the lessor compared to the present value of the tax shield to the lessee?

• A) The value to the lessee is 64% of the value to the lessor
• B) The value to the lessee is 125% of the value to the lessor
• C) The value to the lessor is 85% of the value to the lessee
• D) The value to the lessor is 164% of the value to the lessee