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

Question

Quizplus · Accepted Answer

In order for a firm to estimate its cost of debt capital by observing the price of its debt instruments, the firm must depend on markets being reasonably efficient. This means that the prices of the debt instruments must accurately reflect the risk and return associated with them. If the market is not efficient, the observed prices may not accurately reflect the true cost of debt. Therefore, choice A is the correct answer.

Choices B and C are incorrect. The fact that the debt is privately held by the firm or that the beta of the debt is greater than the beta of the firm's equity does not affect the firm's ability to estimate its cost of debt capital by observing the price of its debt instruments.

In Order for a Firm to Estimate Its Cost of Debt