Which of the following is the correct denominator to use in the equation when using a company's book value of debt to estimate the cost of debt?

Question

Quizplus · Accepted Answer

The best denominator to use in the equation is the average net debt, which is the average of the beginning and ending balances of the company's debt after subtracting any cash or cash equivalents. This is because the cost of debt is the interest rate that the company pays on its outstanding debt, and the net debt reflects the actual amount of debt that the company is paying interest on. Gross interest and net interest do not reflect the actual amount of debt outstanding, and average gross debt does not account for any cash or cash equivalents that the company may have on its balance sheet.

Which of the Following Is the Correct Denominator to Use