The Cost of Capital: Cost of Debt A firm\'s before-tax cost of debt, rd, is the

Question

The Cost of Capital: Cost of Debt

A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on (-Select-outstanding, secured, or new ) debt. Because interest is tax deductible, the relevant cost of (-Select-outstanding, secured, or new) debt used to calculate a firm's WACC is the (-Select-after-tax or before-tax) cost of debt, rd (1 – T). The (-Select after-tax or before-tax) cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on (Select after-tax or before-tax) cash flows. It is important to emphasize that the cost of debt is the interest rate on (Select-outstanding or new) debt, not (-Select-outstanding or new) debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is (Select-relevant or irrelevant) because we need to know the cost of (Select-outstanding, secured or new) capital. For these reasons, the (-Select-current yield rate, yield to maturity, or coupon rate) on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the (-Select-current yield rate, yield to maturity, or coupon rate). The (Select-current yield rate, yield to maturity, or coupon rate) on the company's (-Select-long or short) term debt is generally used to calculate the cost of debt because more often than not, the capital is being raised to fund (-Select-long or short) term projects.

Please fill in the blank and accurately. Thank you!

Explanation / Answer

a) new debt

b) after-tax

c) after-tax cost of debt

d) after-tax cash flows

e) new debt and not outstanding

f) irrelevant

g) outstanding

h) yield to maturity

i) coupon rate

j) yield to maturity and long term

k) long

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.