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5 Written questions

5 Matching questions

  1. flotation cost
  2. capital component
  3. RPm
  4. required rate of return
  5. wacc
  1. a ? = rRF + RP
  2. b rm - rRF
  3. c the percentage cost of issuing new common stock. F
  4. d one of the types of capital used by firms to raise funds. They are investor-supplied items including debt, preferred stock, and common equity
  5. e WdRd(1-T) + WpRp + WcRs

5 Multiple choice questions

  1. the cost of each component
  2. interest rate on the firm's new debt. before-tax component cost of debt
  3. Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock
  4. (adjusted DCF cost) - (pure DCF cost)
  5. 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 True/False questions

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


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


  3. retained earnings breakpointthe amount of capital raised beyond which new common stock must be issued.


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


  5. capm equationrm - rRF


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