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5 Written Questions

5 Matching Questions

  1. retained earnings breakpoint
  2. flotation cost
  3. target capital structure
  4. rp
  5. wd, wp, wc
  1. a the percentage cost of issuing new common stock. F
  2. b the mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects
  3. c target weights of debt, preferred stock, and common equity. The weights are percentages of the different types of capital the firm plans to use when it raises capital in the future
  4. d component cost of preferred stock, found as the yield investors expect to earn on the preferred stock
  5. e (addition to retained earnings for the year) / (equity fraction)

5 Multiple Choice Questions

  1. WdRd(1-T) + WpRp + WcRs
  2. re = D1/[P(1-F)] + g
  3. rs + (flotation adjustment)
  4. ? = rRF + RP
  5. the rate of return required by stockholders on a firm's common stock. Rs

5 True/False Questions

  1. rd(1-T)interest rate on the firm's new debt. before-tax component cost of debt


  2. weighted average cost of capitalthe interest rate the firm must pay on new debt


  3. flotation adjustment(adjusted DCF cost) - (pure DCF cost)


  4. capital componentrs = rRF + (RPm)b


  5. before-tax cost of debtthe relevant cost of new debt, taking into account the tax deductibility of interest; used to calculate the WACC. It is the interest rate on new debt minus the tax savings that result because interest is tax deductible


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