Question #14
Reading: Reading 17 Cost of Capital - Advanced Topics
PDF File: Reading 17 Cost of Capital - Advanced Topics.pdf
Page: 6
Status: Unattempted
Question
If a company's debt is publicly traded, the most appropriate estimate of its cost of debt can be derived from:
Answer Choices:
A. matrix pricing, based on the yields on traded securities with the same maturity and credit ratings
B. an inferred credit rating on the debt based on the financial ratios of the company
C. the yield to maturity for the firm’s longest-maturity straight debt outstanding
Explanation
If a company's debt is publicly traded, the yield to maturity for the firm's longest-maturity
straight debt outstanding is our best estimate of its cost of debt. If a company's debt is not
traded (or is thinly traded), we can use matrix pricing, based on the yields on traded
securities with the same maturity and credit ratings. If the debt is not credit rated, we can
use financial ratios of the company such as interest coverage or financial leverage to infer
a credit rating on the debt.