The pre-tax cost of debt:
A)is based on the current yield to maturity of the firm's outstanding bonds.
B)is equal to the coupon rate on the latest bonds issued by a firm.
C)is equivalent to the average current yield on all of a firm's outstanding bonds.
D)is based on the original yield to maturity on the latest bonds issued by a firm.
E)has to be estimated as it cannot be directly observed in the market.

Question

Quizplus · Accepted Answer

The pre-tax cost of debt is based on the current yield to maturity of the firm's outstanding bonds. This is because the yield to maturity reflects the market's current assessment of the risk of default and the current prevailing interest rates.

The Pre-Tax Cost of Debt