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5 Written questions

5 Matching questions

  1. capm equation
  2. component cost
  3. re
  4. rd(1-T)
  5. weighted average cost of capital
  1. a a weighted average of the component costs of debt, preferred stock, and common equity
  2. b rs = rRF + (RPm)b
  3. c component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock
  4. d after-tax component cost of debt
  5. e the cost of each component

5 Multiple choice questions

  1. rm - rRF
  2. 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
  3. rs + (flotation adjustment)
  4. the mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects
  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. retained earnings breakpointthe amount of capital raised beyond which new common stock must be issued.

          

  2. required rate of returnthe number of shares of stock outstanding multiplied by the current stock price

          

  3. 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

          

  4. cost of retained earningsrs + (flotation adjustment)

          

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