Chapter 12 - Cost of Capital Flashcards

1
Q

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

A

cost of capital

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2
Q

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

A

cost of equity

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3
Q

the return preferred stock investors require on their investment

A

cost of preferred stock

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4
Q

purpose of the cost of equity

A

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

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5
Q

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

A

simple model

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6
Q

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

A

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

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7
Q

the return lenders require on the firms debt

A

Cost of Debt

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8
Q

purpose of cost of debt

A

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

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9
Q

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

A

WACC

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