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5 Written questions

5 Matching questions

  1. wacc
  2. wd, wp, wc
  3. rs
  4. flotation cost adjustment
  5. cost of preferred stock
  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 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
  4. d the amount that must be added to rs to account for flotation costs to find re
  5. e WdRd(1-T) + WpRp + WcRs

5 Multiple choice questions

  1. (adjusted DCF cost) - (pure DCF cost)
  2. the percentage cost of issuing new common stock. F
  3. the interest rate the firm must pay on new debt
  4. component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock
  5. rm - rRF

5 True/False questions

  1. market value of equityrs + (flotation adjustment)


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


  3. required rate of return? = rRF + RP


  4. cost of external equity? = D1/P0 + g


  5. waccthe firm's weighted average cost of capital


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