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5 Written questions

5 Matching questions

  1. capital component
  2. flotation cost
  3. wd, wp, wc
  4. cost of new common stock
  5. before-tax cost of debt
  1. a the percentage cost of issuing new common stock. F
  2. b The cost of external equity; based on the cost of retained earnings, but increased for flotation costs. Re
  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 the interest rate the firm must pay on new debt
  5. e one of the types of capital used by firms to raise funds. They are investor-supplied items including debt, preferred stock, and common equity

5 Multiple choice questions

  1. the amount of capital raised beyond which new common stock must be issued.
  2. the firm's weighted average cost of capital
  3. rs = rRF + (RPm)b
  4. ? = D1/P0 + g
  5. interest rate on the firm's new debt. before-tax component cost of debt

5 True/False questions

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


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


  3. target capital structurethe mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects


  4. rpcomponent cost of preferred stock, found as the yield investors expect to earn on the preferred stock


  5. component costthe cost of each component