The Relevant Cost of Debt for Use in a WACC

question 133

Multiple Choice

The relevant cost of debt for use in a WACC computation, which will be used as the required rate of return for a new project, should be the rate that is the:

• A) Average coupon rate for all outstanding bond issues.
• B) Average yield-to-call for all callable bond issues.
• C) After-tax weighted average yield-to-maturity of all outstanding bonds.
• D) After-tax yield-to-maturity of the highest rated bond available on the market.
• E) Average of the risk-free rate of return and the after-tax weighted average yield-to-maturity of all outstanding bonds.

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Definitions:

Poor Country

A nation characterized by a low standard of living, low income per capita, and often lacking in basic infrastructure and services.

Rich Country

A nation characterized by a high gross domestic product (GDP) per capita, indicating a high standard of living, advanced technological infrastructure, and a well-developed economy.

Nonrenewable Resource

A nonrenewable resource is a natural resource that cannot be replenished or takes a very long time to replenish at the same rate it is consumed or used.

Saving Rates

The proportion of disposable income that is saved by households rather than spent on goods and services.