- 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
The before-tax cost of debt capital for a firm ______
A. is the return that the firm's creditors demand on new borrowing.
B. can be estimated by finding the yield on recently issued, longer-maturity bonds with a lower bond rating.
C. can be calculated by looking at the coupon rates on existing bonds of similar risk.
User Contributed Comments 7
| User | Comment |
|---|---|
| danlan | C: might be correct if changed to "can be estimated". |
| anricus | This does not take into account the tax rate. I thought the cost of debt was Mk rate of interest * (1-tax rate) |
| sevaa1 | the question asks for the "before-tax" cost of debt, so the taxes do not need to be taken into account here. |
| sheenalim | why is B wrong? |
| sbhatia | B is wrong in part because we have no idea if "longer maturity bonds" will apply to the firm at hand. They could be looking at both short-term and medium-terms issues what could potentially demand a different rate. A is clearly right because it is the most direct measure of required interest rate. |
| NickGerli | C would be correct if it added "and same maturity." |
| kingirm | C is correct. It is even given in the AN LOS. A might be correct for the "next" debt issue of the firm but for existing debt C must hold correct. |