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5 Written questions

5 Matching questions

  1. wacc
  2. rs
  3. weighted average cost of capital
  4. capital component
  5. flotation adjustment
  1. a (adjusted DCF cost) - (pure DCF cost)
  2. b the firm's weighted average cost of capital
  3. c a weighted average of the component costs of debt, preferred stock, and common equity
  4. d Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock
  5. e 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 Multiple choice questions

  1. after-tax component cost of debt
  2. re = D1/[P(1-F)] + g
  3. 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
  4. the interest rate the firm must pay on new debt
  5. 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 True/False questions

  1. cost of preferred 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. 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

          

  3. recomponent cost of preferred stock, found as the yield investors expect to earn on the preferred stock

          

  4. capm equationrs = rRF + (RPm)b

          

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

          

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