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5 Written Questions

5 Matching Questions

  1. cost of external equity
  2. after-tax cost of debt
  3. re
  4. flotation cost
  5. before-tax cost of debt
  1. a the percentage cost of issuing new common stock. F
  2. b 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. c the interest rate the firm must pay on new debt
  4. d rs + (flotation adjustment)
  5. e component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock

5 Multiple Choice Questions

  1. 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
  2. re = D1/[P(1-F)] + g
  3. ? = rRF + RP
  4. rm - rRF
  5. (addition to retained earnings for the year) / (equity fraction)

5 True/False Questions

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

          

  2. cost of retained earningsrs + (flotation adjustment)

          

  3. rdcomponent cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock

          

  4. cost of preferred stockre = D1/[P(1-F)] + g

          

  5. market value of equitythe number of shares of stock outstanding multiplied by the current stock price

          

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