In a Changing Interest Rate Environment,the Cost of New Debt

question 49

Multiple Choice

In a changing interest rate environment,the cost of new debt

• A)is assumed to be zero for a levered firm.
• B)is equal to the embedded cost of old debt.
• C)generally exceeds the cost of equity on a pretax basis.
• D)is equal to the cost of borrowing.
• E)increases when taxes are considered.

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Definitions:

Total Surplus

is the sum of consumer surplus and producer surplus, representing the overall economic benefit to society from trade or market activity.

Consumer Surplus

The split between the sum consumers would ideally pay for a good or service and the sum they actually end up paying.

Producer Surplus

The discrepancy between the price at which sellers are prepared to offer a product and the actual selling price they obtain.

Market Failure

The failure of a market to be efficient; when the individual pursuit of self-interest leads to bad results for society as a whole.