There Are Two Costs of Debt Finance

question 93

True/False

There are two costs of debt finance.The explicit cost of debt is the rate of interest that bondholders demand.But there is also an implicit cost, because borrowing decreases the required rate of return to equity.

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Definitions:

Financial Models

Quantitative tools typically built in spreadsheets to forecast a financial aspect of a business entity.

Changes in Outputs

Variations in the quantity or quality of a company's production or services over a given period.

Contribution Margin Ratio

A financial metric that shows the percentage of sales revenue that exceeds variable costs, indicating how much revenue contributes to fixed costs and profit.

Break-Even Point

The point where total costs and total revenues are equal, leading to no profit or loss from production or sales.