Chapter 12 - Cost of Capital

Question 1

the return an investor receives is the cost of that security to the company that issued it

Answer 1

cost of capital

Question 2

the return common stock investors require on their investment in the firm

Answer 2

cost of equity

Question 3

the return preferred stock investors require on their investment

Answer 3

cost of preferred stock

Question 4

purpose of the cost of equity

Answer 4

every $1 in common stock equity is how much we are paying investors

Question 5

Advantages of Dividend Growth Model to find Cost of Preferred Stock and Cost of Equity

Answer 5

simple model

Question 6

Disadvantages of Dividend Growth Model to find Cost of Preferred Stock and Cost of Equity

Answer 6

Only applies to companies issuing dividends
dividends must be fixed (for preferred stock)
Dividends must be constant rate (common stock)
Estimated growth rates
fails to consider risk

Question 7

the return lenders require on the firms debt

Answer 7

Cost of Debt

Question 8

purpose of cost of debt

Answer 8

to see for every $1 in bonds, how much we pay our lenders

Question 9

the cost of capital for the firm as a whole and can be interpreted as the required return on the overall firm

Answer 9

WACC