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5 Written questions

5 Matching questions

  1. cost of new common stock
  2. rp
  3. required rate of return
  4. after-tax cost of debt
  5. rd(1-T)
  1. a after-tax component cost of debt
  2. b re = D1/[P(1-F)] + g
  3. c component cost of preferred stock, found as the yield investors expect to earn on the preferred stock
  4. d 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
  5. e ? = rRF + RP

5 Multiple choice questions

  1. (adjusted DCF cost) - (pure DCF cost)
  2. Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock
  3. the 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
  4. component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock
  5. the rate of return required by stockholders on a firm's common stock. Rs

5 True/False questions

  1. cost of new common stockThe cost of external equity; based on the cost of retained earnings, but increased for flotation costs. Re

          

  2. flotation cost adjustmentthe amount that must be added to rs to account for flotation costs to find re

          

  3. weighted average cost of capitalthe 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

          

  4. market value of equityrs + (flotation adjustment)

          

  5. capm equationrs = rRF + (RPm)b

          

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