A Lessor Can Borrow at a Rate of 7 Percent

question 31

Multiple Choice

A lessor can borrow at a rate of 7 percent and has a tax rate of 21 percent.The lessee can borrow at a rate of 8 percent and has a tax rate of 21 percent.Assume an asset costs $138,000 and can be leased in exchange for two annual payments of $70,000 with the first payment due at the time of signing.What is the incremental cash flow at Time 0 for the lessee for a purchase instead of a lease?

• A)−$92,500
• B)$138,000
• C)$92,500
• D)−$82,700
• E)−$138,000

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Definitions:

Common Shares

Equity securities that represent ownership in a corporation, providing voting rights and potential dividends.

Debt Issue

This term refers to the process by which a company raises funds through the sale of debt instruments, such as bonds.

Operating Activities

Day-to-day actions that are involved in running a company, such as selling products, managing expenses, and paying employees, which are reflected in the cash flow statement.