CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Which of the following is NOT true regarding a 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.
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