A firm's cost of debt can best be estimated:
A)by adding a risk premium to the coupon rate.
B)using the yield-to-maturity on newly issued debt of other firms.
C)using the firm's borrowing rate on short-term loans.
D)using the yield-to-maturity on the firm's outstanding debt.

Question

Quizplus · Accepted Answer

The cost of debt for a firm is best estimated using the yield-to-maturity (YTM) on the firm's outstanding debt because it reflects the current market rates that investors demand to hold the firm's debt, incorporating both the time value of money and the risk premium associated with the firm's credit risk.

A Firm's Cost of Debt Can Best Be Estimated