In order for a company to estimate its cost of debt capital by observing the price of its debt instruments,
A) the company must depend on markets being reasonably efficient.
B) the debt must be privately held.
C) the beta of the debt must be greater than the beta of the company's equity.
D) None of the above.

Question

Quizplus · Accepted Answer

Observing the price of debt instruments in the market is only useful if the markets are reasonably efficient, as this ensures that the price reflects the market's perception of the creditworthiness of the company. If the markets are not reasonably efficient, the observed price may not provide an accurate estimate of the cost of debt capital. Choices B and C are incorrect because they are not relevant to estimating the cost of debt capital.

In Order for a Company to Estimate Its Cost of Debt