When Attempting to Determine the Appropriate Cost of Debt for a Company,which

question 22

Multiple Choice

When attempting to determine the appropriate cost of debt for a company,which of the following methods would not be considered valid?

• A)Determine the implied discount rate that equates the coupon payments and face value of the bond with the current market price.
• B)Use the companies credit rate to adjust the 10- year bond rate up or down to an appropriate rate.
• C)Calculate the average coupon rates of all of the debt securities issued by the firm.
• D)All of the above are valid methods.

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Definitions:

Fair Value Enterprise Method

An approach to valuation that estimates the price at which an entire business would exchange between knowledgeable and willing parties.

Journal Entry

A record of financial transactions in the accounting system of a business, consisting of debits and credits.

Elimination Entry

Elimination entry involves making accounting entries in consolidated financial statements to remove the effects of intercompany transactions.

Contingent Consideration

A future payment in a transaction that is dependent on specific outcomes or events.