The pre-tax cost of debt for a new issue of debt is determined by
A) the investor's required rate of return on issued stock.
B) the coupon rate of existing debt.
C) the yield to maturity of outstanding or comparable bonds.
D) All of these options are true.

Question

Quizplus · Accepted Answer

The pre-tax cost of debt for a new issue of debt is determined by the yield to maturity of outstanding or comparable bonds. This is because investors will expect a return similar to what they would get from other similar investments. The coupon rate of existing debt may impact the cost of issuing new debt if it is significantly higher or lower than current market rates, but it is not the primary factor in determining the cost of new debt. The required rate of return on issued stock is not relevant to the cost of debt.

The Pre-Tax Cost of Debt for a New Issue of Debt