Question

If a firm has publicly traded debt then the yield to maturity is approximately the same as:

A) the before-tax cost of debt

B) the WACC

C) the 10-year Treasury bond rate.

D) the after-tax cost of debt.

Answer #1

Answer is Option A.

Let us eliminate the options rather than choosing A.

Option B is incorrect as debt yield would not reflect either the cost of equity or capital structure at firm. Hemce, Wacc for firm would be different.

Option c is incorrect. Publicly traded corborate bond would always have a higher yield than risk free T Bill, given corporate bond has a higher risk of default.

Option d is incorrect. The YTM on bond would also not reflect the tax rate on company and hemce after tax cost of debt is not the answer as well.

So answer is Option A.

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