CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Beal, Inc. intends to lease a machine from Paul Corporation. Beal's incremental borrowing rate is 14%. The prime rate of interest is 8%. Paul's implicit rate in the lease is 10%; this is known to Beal. What interest rate will be used to calculate the minimum lease payments?
A. 8%
B. 10%
C. 14%
Explanation: The lessor wants to either recover the fair market value of the asset it is selling or recover whatever is possible. The lessor's implicit rate in the lease is the rate of interest that the lessor charges the lessee for providing financing. The implicit rate is usually higher than the lessor's own borrowing rate so that the lessor makes a profit on the interest spread. The lessee's incremental borrowing rate does not enter into this calculation. The prime rate (8%) is never used unless it happens to be the same as the implicit rate.

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