If a Financial Lease Analysis Uses a Higher Discount Rate

question 11

Multiple Choice

If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan, which one of the following reasons would best explain that dichotomy?

• A)the lessor charges a higher interest rate on the lease than normally.
• B)the asset is unreliable, so requires a higher discount rate.
• C)the lessee may be unsure that he can earn enough taxable income to use the tax shields in the lease analysis.
• D)the discount rate is uncertain, so a higher one is used.

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Definitions:

Systematic Basis

A methodological approach of allocating costs or revenues over a specified period of time in a consistent and logical manner.

Voting Stock

Securities that give the shareholder the right to vote on company matters, such as electing the board of directors and approving corporate policies.

Contingent Payment

A payment that depends on achieving certain conditions or outcomes in the future.

Market Value

The current quoted price at which an asset or a company can be bought or sold on the open market.