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5 Written questions

5 Matching questions

  1. cost of preferred stock
  2. cost of external equity
  3. target capital structure
  4. after-tax cost of debt
  5. rs
  1. a the mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects
  2. b 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. 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 rs + (flotation adjustment)
  5. e Component cost of common equity raised by retained earnings or internal equity.

    Required rate of return on a firm's common stock

5 Multiple choice questions

  1. (adjusted DCF cost) - (pure DCF cost)
  2. interest rate on the firm's new debt. before-tax component cost of debt
  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. the percentage cost of issuing new common stock. F
  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. cost of new common 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. waccWdRd(1-T) + WpRp + WcRs

          

  3. market value of equitythe number of shares of stock outstanding multiplied by the current stock price

          

  4. cost of new common 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

          

  5. capm equationthe cost of each component