Question

In order for a firm to estimate its cost of debt capital by observing the price of its debt instruments,

A) the firm must depend on markets being reasonably efficient.
B) the debt must be privately held.
C) the beta of the debt must be greater than the beta of the firm's equity.
D) None of the above.

Answer 1

In order to estimate its cost of debt capital by observing the price of its debt instruments, a firm must depend on markets being reasonably efficient.

Step-by-step explanation:

In order for a firm to estimate its cost of debt capital by observing the price of its debt instruments, the firm must depend on markets being reasonably efficient.

This means that the price of the debt instruments reflects all available information and is a true reflection of the cost of debt capital. If markets are not efficient, then the observed price may not accurately represent the cost of debt capital for the firm.

Therefore, option A) the firm must depend on markets being reasonably efficient is the correct answer.