In estimating a firm's cost of debt, which of the following should be used?
A)The yield to maturity when the bonds were issued.
B)The yield to maturity of the bonds based on current bond prices.
C)The coupon rate payable on the bonds.
D)The coupon rate payable on similar bonds.

Question

Quizplus · Accepted Answer

The yield to maturity of the bonds based on current bond prices should be used to estimate a firm's cost of debt. This is because the yield to maturity reflects the current market expectations of the bond's return and is a better measure of the cost of debt than the coupon rate payable on the bonds, which is fixed and may not reflect the market conditions. The yield to maturity when the bonds were issued may also be outdated and not reflective of current market conditions. Similarly, using the coupon rate payable on similar bonds may not accurately reflect the risk and return expectations of the specific bonds issued by the firm.

In Estimating a Firm's Cost of Debt, Which of the Following