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Basic Question 2 of 9
Which of the following is NOT true regarding a firm's before-tax cost of debt?
B. The firm's before-tax cost of debt based on past borrowing is known as embedded debt cost.
C. It is possible to determine the firm's before-tax cost of debt by observing yields on similar bonds that were recently issued.
D. The coupon rate on outstanding debt is not necessarily the firm's current before-tax cost of debt.
E. The firm's cost of equity is generally easier to calculate than the firm's before-tax cost of debt.
A. The before-tax cost of debt is the return the firm's creditors demand on new borrowing.
B. The firm's before-tax cost of debt based on past borrowing is known as embedded debt cost.
C. It is possible to determine the firm's before-tax cost of debt by observing yields on similar bonds that were recently issued.
D. The coupon rate on outstanding debt is not necessarily the firm's current before-tax cost of debt.
E. The firm's cost of equity is generally easier to calculate than the firm's before-tax cost of debt.
User Contributed Comments 3
| User | Comment |
|---|---|
| cfairs | The notes talk about complications in debt cost because of debt features such as options, seniority. |
| Jurrens | yeah, but here they're saying debt's easier to calculate since for equities you also have options, preferred shares, non-explicit return rate etc. At least for debt there is a coupon rate. |
| khalifa92 | 1- estimating the cost of preferred equity is straightforward because the dividend is stated and fixed. 2- debt capital involves a stated legal obligation, the company pays interest and repay principal on borrowing. 3- estimating the cost of common equity is more challenging. |
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Learning Outcome Statements
calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach;
calculate and interpret the cost of noncallable, nonconvertible preferred stock;
CFA® 2024 Level I Curriculum, Volume 4, Module 33.