The industry convention is to use total debt when estimating the cost of debt of a firm,as cash reserves have no impact upon the company's 'true' debt position.

Question

Quizplus · Accepted Answer

The statement is false. Cash reserves can have an impact on the company's 'true' debt position as it can be used to pay off debt or finance future investments. Therefore, the industry convention is to use net debt (total debt minus cash reserves) to estimate the cost of debt for a firm.

The Industry Convention Is to Use Total Debt When Estimating