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5 Written questions

5 Matching questions

  1. cost of retained earnings
  2. rd(1-T)
  3. target capital structure
  4. before-tax cost of debt
  5. flotation cost
  1. a the mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects
  2. b the rate of return required by stockholders on a firm's common stock. Rs
  3. c after-tax component cost of debt
  4. d the interest rate the firm must pay on new debt
  5. e the percentage cost of issuing new common stock. F

5 Multiple choice questions

  1. rs = rRF + (RPm)b
  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. ? = D1/P0 + g
  4. 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
  5. Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock

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


  3. waccrm - rRF


  4. RPmrm - rRF


  5. flotation cost adjustmentthe amount that must be added to rs to account for flotation costs to find re


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