To Determine the Actual Cost of Using Debt, a Firm

question 33

Multiple Choice

To determine the actual cost of using debt, a firm must adjust its bonds' average yield to maturity for the fact that _____. 

• A)interest payments on debt represent taxable income to the firm
• B)interest payments on debt represent a tax deductible expense to the firm
• C)the average yield to maturity on its debt is a positive return that the firm receives (earns)
• D)the average yield to maturity on the firm's debt determines the tax rate that it pays on its operating income
• E)the firm's bondholders do not have to pay taxes on the interest they receive from the firm

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Definitions:

Negotiable Instrument

A written document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.

Holder

An individual or entity that legally possesses a negotiable instrument, like a check or bond, and has the right to enforce its terms.

Immunity

A provision or status that protects a person or entity from legal action or liability under certain conditions.

Drawee

The party directed by a drafter (e.g., the issuer of a check) to pay a certain sum of money to the party named in the document.