The before-tax cost of debt, rd, is the same as the:
A) average yield to maturity (YTM) associated with the firm's bonds.
B) dividend yield associated with the firm's common stock.
C) average coupon rate of the firm's bonds.
D) return on equity if the firm has no preferred stock.
E) the firm's marginal tax rate.

Question

Quizplus · Accepted Answer

The before-tax cost of debt is the yield to maturity associated with the firm's bonds. This is because the yield to maturity is the return that investors demand for lending money to the firm in the form of bonds. It takes into account the bond's face value, coupon rate, and time to maturity. Therefore, choice A is the best answer.

The Before-Tax Cost of Debt, Rd, Is the Same as The