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5 Written questions

5 Matching questions

  1. market value of equity
  2. target capital structure
  3. flotation cost
  4. wd, wp, wc
  5. re
  1. a the percentage cost of issuing new common stock. F
  2. b the mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects
  3. c 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. d component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock
  5. e the number of shares of stock outstanding multiplied by the current stock price

5 Multiple choice questions

  1. The cost of external equity; based on the cost of retained earnings, but increased for flotation costs. Re
  2. re = D1/[P(1-F)] + g
  3. 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
  4. interest rate on the firm's new debt. before-tax component cost of debt
  5. rs = rRF + (RPm)b

5 True/False questions

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

          

  2. cost of retained earningsrs + (flotation adjustment)

          

  3. capital componentrs = rRF + (RPm)b

          

  4. before-tax cost of debtthe 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. weighted average cost of capitala weighted average of the component costs of debt, preferred stock, and common equity