If a company has on issue debentures paying a coupon rate of 12% p.a.and the market yield on similar securities is 18 per cent,what is the correct cost of debt the company should use when estimating the WACC?
A)None of the given options.
B)15%
C)12%
D)18%

Question

Quizplus · Accepted Answer

The correct cost of debt for the company should be equal to the market yield on similar securities, which is 18%. This is because the market yield represents the required return for investors purchasing those securities, and therefore, it reflects the cost of debt for the issuing company. The coupon rate of 12% is the rate at which the company will make interest payments to debenture holders, but it does not necessarily represent the cost of debt for the company. Therefore, option D is the best choice.

If a Company Has on Issue Debentures Paying a Coupon