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5 Written questions

4 Matching questions

  1. rp
  2. cost of retained earnings
  3. capm equation
  4. retained earnings breakpoint
  1. a the rate of return required by stockholders on a firm's common stock. Rs
  2. b (addition to retained earnings for the year) / (equity fraction)
  3. c rs = rRF + (RPm)b
  4. d component cost of preferred stock, found as the yield investors expect to earn on the preferred stock

5 Multiple choice questions

  1. re = D1/[P(1-F)] + g
  2. rm - rRF
  3. one of the types of capital used by firms to raise funds. They are investor-supplied items including debt, preferred stock, and common equity
  4. after-tax component cost of debt
  5. component cost of external equity. Equal to rs plus a factor that reflects the cost of issuing new stock

5 True/False questions

  1. component costthe cost of each component


  2. cost of preferred stockThe cost of external equity; based on the cost of retained earnings, but increased for flotation costs. Re


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


  4. after-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. required rate of returnthe number of shares of stock outstanding multiplied by the current stock price


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