For non-rated firms, the analyst may estimate the pretax cost of debt for an individual firm by comparing debt-to-equity or total capital ratios, interest coverage ratios, and operating margins with those of similar rated firms.

Question

Quizplus · Accepted Answer

This is correct. When a firm is not rated by credit agencies, analysts may use various financial ratios and metrics to estimate the cost of debt based on comparable rated firms in the industry.

For Non-Rated Firms, the Analyst May Estimate the Pretax Cost