- CFA Exams
- CFA Level I Exam
- Topic 4. Corporate Issuers
- Learning Module 33. Cost of Capital-Foundational Topics
- Subject 2. Cost of Debt and Preferred Stock
CFA Practice Question
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.
Correct Answer: E
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. |