First and foremost, we must remember that the cost of capital (debt or equity) must be an incremental cost.
To evaluate the cost of debt, use bond yield to maturity rather than other yields. Let's examine each response option in turn: is determined by the current yield to maturity of the company's outstanding bonds, which include both old and recently-issued bonds and are not subject to incremental cost. False. is equivalent to the coupon rate on the company's most recent bonds. The coupon rate is unimportant. False.is the same as the average current yield on all the outstanding bonds of a corporation. The current yield has no bearing. False. is based on the initial yield to maturity of the most recent bonds a firm has issued. True if all requirements are met.
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