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5 Written questions

5 Matching questions

  1. component cost
  2. weighted average cost of capital
  3. cost of retained earnings
  4. cost of preferred stock
  5. rs
  1. a ? = D1/P0 + g
  2. b the cost of each component
  3. c Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock
  4. d a weighted average of the component costs of debt, preferred stock, and common equity
  5. e 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 Multiple choice questions

  1. (adjusted DCF cost) - (pure DCF cost)
  2. one of the types of capital used by firms to raise funds. They are investor-supplied items including debt, preferred stock, and common equity
  3. re = D1/[P(1-F)] + g
  4. the amount that must be added to rs to account for flotation costs to find re
  5. component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock

5 True/False questions

  1. 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


  2. wacccomponent cost of preferred stock, found as the yield investors expect to earn on the preferred stock


  3. market value of equity? = rRF + RP


  4. wd, wp, wcWdRd(1-T) + WpRp + WcRs


  5. cost of external equityrs + (flotation adjustment)


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