Final answer:
The use of yield to maturity is suitable for calculating a large, healthy firm's WACC as it accurately reflects the current market cost of debt based on the firm's ability to repay and current interest rates.
Step-by-step explanation:
On a large and healthy firm, the use of yield to maturity as the cost of debt when calculating weighted average cost of capital (WACC) is appropriate because it reflects the firm's current cost of borrowing in the market. This measure takes into account the present discounted value of future debt payments, including both principal and interest, which represents the true cost to the company of issuing the debt. Firms with a high profitability record can issue debt at lower yields since the risk of default is perceived to be lower, which in turn impacts the WACC. Additionally, in a low-interest-rate environment, the yield to maturity on existing debt would typically decrease, making the cost of debt lower. Large and well-known firms often prefer issuing bonds over bank loans, as bonds allow them to raise significant amounts of capital for investments or to refinance existing debt.
When calculating the Weighted Average Cost of Capital (WACC), the use of yield to maturity as the cost of debt is appropriate for a large and healthy firm because it reflects the market interest rate for the firm's debt. The yield to maturity represents the total return an investor can expect to earn by holding the debt until it matures, taking into account both interest payments and any capital gains or losses from changes in the bond's price.