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5 Written questions

4 Matching questions

  1. cost of new common stock
  2. after-tax cost of debt
  3. capital component
  4. component cost
  1. a re = D1/[P(1-F)] + g
  2. b 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. c the cost of each component
  4. d 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

5 Multiple choice questions

  1. the interest rate the firm must pay on new debt
  2. rm - rRF
  3. the mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects
  4. a weighted average of the component costs of debt, preferred stock, and common equity
  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. wd, wp, wctarget 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


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


  3. market value of equity? = rRF + RP


  4. retained earnings breakpoint? = rRF + RP


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