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5 Written Questions

5 Matching Questions

  1. flotation cost adjustment
  2. capm equation
  3. rp
  4. retained earnings breakpoint
  5. rs
  1. a rs = rRF + (RPm)b
  2. b Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock
  3. c the amount that must be added to rs to account for flotation costs to find re
  4. d component cost of preferred stock, found as the yield investors expect to earn on the preferred stock
  5. e the amount of capital raised beyond which new common stock must be issued.

5 Multiple Choice Questions

  1. interest rate on the firm's new debt. before-tax component cost of debt
  2. the 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
  3. 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. re = D1/[P(1-F)] + g
  5. rs + (flotation adjustment)

5 True/False Questions

  1. cost of retained earnings? = D1/P0 + g


  2. cost of retained earningsthe rate of return required by stockholders on a firm's common stock. Rs


  3. market value of equityrs + (flotation adjustment)


  4. cost of new common stockthe rate of return investors require on the firm's preferred stock. Rp is calculated as the preferred dividend, Dp, divided by the current price, Pp


  5. target capital structurethe mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects


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