Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

Question

BlackTom AI · Accepted Answer

The interest rate a firm pays when it borrows funds is referred to as its cost of debt.

1) Relevant knowledge points and concepts
- Cost of debt: the effective interest rate a company pays on its borrowed funds; a component of the firm’s weighted average cost of capital (WACC).
- Pre‑tax vs. after‑tax cost of debt: interest expense is tax-deductible, so the after‑tax cost of debt = r_d × (1 − T_c), where r_d is the borrowing rate and T_c is the corporate tax rate.
- Distinctions from related terms: cost of equity (return required by shareholders), coupon rate (fixed bond payment rate), risk‑free rate (government securities), and yield to maturity (market measure for a bond’s return).

2) Step‑by‑step reasoning
- Wright Market Research borrows at 6.8% per year. That 6.8% is the interest rate charged on its debt.
- From the firm’s perspective, the relevant label for the interest it pays on borrowed funds is “cost of debt,” because it represents the expense of using debt financing and will be used when computing WACC.

3) Calculation example (intermediate steps)
- If you wanted the after‑tax cost of debt and assumed a corporate tax rate T_c = 21%:
  r_after_tax = 6.8% × (1 − 0.21)
  r_after_tax = 6.8% × 0.79 = 5.372%
- This shows how the 6.8% input becomes the pre‑tax cost of debt and is adjusted for taxes when used in WACC.

4) Why the correct answer is correct
- The 6.8% is the rate the firm pays on borrowed funds; by definition that is the firm’s cost of debt (pre‑tax). It directly measures the expense of debt financing.

5) Why other plausible options would be incorrect
- Cost of equity: pertains to returns demanded by shareholders, not the interest paid on loans.
- Coupon rate: applies to a specific bond’s contractual interest payments, which may differ from the market borrowing rate for the firm as a whole.
- Risk‑free rate: a baseline (e.g., Treasury yield), typically lower and not equal to a firm’s borrowing rate which includes credit spread.
- Yield to maturity: a bond market measure of total return, not the generic borrowing cost unless specifically referring to issued bonds priced in the market.

Conclusion: Therefore, the 6.8% borrowing rate is correctly called the cost of debt, which matches the provided answer.

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:单项选择题

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