Which of the following practices are appropriate in estimating a firm's cost of debt?
I.Use the coupon rate on outstanding debt that is investment grade.
II.Use the yield to maturity on outstanding debt that is investment grade.
III.Use the yield to maturity on outstanding debt that is below investment grade.
IV.Use the adjusted present value (APV )method to value firms that have debt that is below investment grade.

Question

Quizplus · Accepted Answer

Using the yield to maturity on outstanding debt is appropriate because it reflects the market's perception of the firm's risk. However, it should be the yield to maturity on outstanding debt that is currently being issued by the firm, not just any outstanding debt. Using the APV method is also appropriate because it takes into account the tax shield provided by the interest payments on debt. This method can be used for firms with both investment grade and below investment grade debt. Therefore, options I and III are not the best choices, while options II and IV are appropriate.

Which of the Following Practices Are Appropriate in Estimating a Firm's