To determine the actual cost of using debt, a firm must adjust its bonds' average yield to maturity for the fact that _____.

Question

Quizplus · Accepted Answer

Interest payments on debt represent a tax deductible expense to the firm, which reduces the actual cost of using debt. This is because the interest payments effectively reduce the firm's taxable income, leading to a lower tax bill. Therefore, the actual cost of using debt must account for this tax benefit.

To Determine the Actual Cost of Using Debt, a Firm