30: Cost of Capital

Question 1

Debt is generally _____ than preferred or common stock

Answer 1

less costly

Question 2

Cost of capital uses ____ values, not ____.

Answer 2

uses market values only, not book values

Question 3

the rate of return required by stockholders

Answer 3

cost of equity

Question 4

the market interest rate (YTM)

Answer 4

cost of debt

Question 5

What is the formula for calculating cost of preferred stock?

Answer 5

dividend/ current price

Question 6

____ risk does not change with a higher debt-to-equity ratio.

Answer 6

Asset

Question 7

____risk rises with higher debt

Answer 7

Equity

Question 8

NPV w/ floatation costs=

Answer 8

PV of cash inflows - cost of project - floatation costs

Question 9

Flotation costs are an additional cost of the project and should be incorporated as an adjustment to the _______ in the valuation computation

Answer 9

initial-period cash flows

Question 10

fees charged by investment bankers when a company raises external equity capital

Answer 10

floatation costs

Question 11

For a publicly traded company, the beta of a stock is estimated from the ____ relationship between returns on the stock and the returns on a ______

Answer 11

linear relationship
proxy- S&P500 (independent variable)
stock returns (dependent variable)

Question 12

Stock’s systematic risk

Answer 12

beta

Question 13

The YTM for calculating cost of debt =

Answer 13

YTM * (1-tax rate)

Question 14

Capital=

Answer 14

debt + equity

Question 15

When calculating a company’s cost of equity, the floatation costs of issuing new common stock should included as an:

Answer 15

initial cash outflow