All of the Following Methods Can Be Used to Estimate

question 134

Multiple Choice

All of the following methods can be used to estimate the cost of debt except:

• A)If the firm targets an "A" rating (or any other bond rating), a review of the yields to maturity on A-rated bonds in Standard & Poor's Bond Guide can provide an estimate of the firm's current borrowing costs.
• B)The firm can solicit the advice of personal financial planners on the cost of issuing new debt.
• C)If the firm has debt currently trading, it can use public market prices and yields to estimate its current cost of debt.
• D)A firm can seek long-term debt financing from a bank or a consortium of banks; preliminary discussions with the bankers will indicate a ballpark interest rate the firm can expect to pay on its borrowing.
• E)All of the above statements are correct.

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Definitions:

Total Fixed Cost

Total fixed cost refers to the sum of all costs required to produce any output in which these costs do not change with the level of output.

Total Variable Cost

The total of expenses that vary directly with the volume of production or sales, such as materials and labor.

Average Total Cost

The sum of all production expenses, both fixed and variable, divided by the total quantity of units manufactured.

Average Fixed Cost

The fixed cost per unit produced, calculated by dividing total fixed costs by the number of units produced.