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5 Written questions

5 Matching questions

  1. RPm
  2. cost of preferred stock
  3. re
  4. wd, wp, wc
  5. rs
  1. a Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock
  2. b 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
  3. c component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock
  4. d 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
  5. e rm - rRF

5 Multiple choice questions

  1. the cost of each component
  2. (adjusted DCF cost) - (pure DCF cost)
  3. component cost of preferred stock, found as the yield investors expect to earn on the preferred stock
  4. WdRd(1-T) + WpRp + WcRs
  5. the mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects

5 True/False questions

  1. 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

          

  2. after-tax cost of debtthe interest rate the firm must pay on new debt

          

  3. required rate of returnthe number of shares of stock outstanding multiplied by the current stock price

          

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

          

  5. retained earnings breakpoint? = rRF + RP

          

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