Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which one of the following is used as the pretax cost of debt?

The market price of common stock

The dividend yield on preferred stock

The coupon rate on new equity

The yield to maturity on existing debt

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Verified step by step guidance

Understand the concept of pretax cost of debt: It represents the effective rate a company pays on its current debt before accounting for taxes. This is crucial for calculating the weighted average cost of capital (WACC).

Identify the correct metric for pretax cost of debt: The yield to maturity (YTM) on existing debt is used because it reflects the market's assessment of the cost of borrowing, considering both the coupon payments and the current market price of the debt.

Eliminate incorrect options: The market price of common stock, dividend yield on preferred stock, and coupon rate on new equity are not related to the cost of debt. These metrics pertain to equity financing, not debt financing.

Explain why YTM is appropriate: Yield to maturity accounts for the total return expected on a bond if held until maturity, including interest payments and any capital gains or losses. This makes it a comprehensive measure of the cost of debt.

Apply this understanding in practice: When calculating the pretax cost of debt, use the YTM of the company's existing debt instruments as it reflects the true cost of borrowing in the current market conditions.