QUESTIONNAIRE - GROUP 4

COST OF RETAINED EARNINGS 1. It is the rate of return required by stockholders on a firm's

common stock.

COST OF NEW COMMON STOCK 2. It is the cost of external equity based on the cost of retained
earnings but increased for flotation costs.

FLOTATION COST 3. It is the percentage cost of issuing new common stock.

RETAINED EARNINGS BREAKPOINT 4. The amount of capital raised beyond which new common
stock must be issued.
WEIGHTED AVERAGE
COST OF CAPITAL (WACC) 5. A weighted average of the component costs of debt, preferred
stock, and common equity.

BEFORE-TAX COST OF DEBT 6. It is the interest rate the firm must pay on new debt.

AFTER-TAX COST OF DEBT 7. The relevant cost of new debt, taking into account the tax
deductibility of interest; used to calculate the WACC.

FLOTATION COST ADJUSTMENT 8. The amount that must be added to "rs" to account for flotation
cost to find "re".

COST OF PREFERRED STOCK 9. The rate of return investors require on the firm's preferred
stock. It is calculated as the preferred dividend divided by the
current price.

CAPM APPROACH 10. It is the most widely used method for estimating the cost of
common equity.

GENERAL ELECTRIC (GE) 11. It is one of the world's best managed companies, and it has
rewarded its shareholders with outstanding returns.

CAPITAL 12. It is obtained in three primary forms: debt, preferred stock,

and common equity.

CAPITAL COMPONENTS 13. One of the types of capital used by firms to raise funds.
Dp
COST OF PREFERRED STOCK 14. rp = Pp

AFTER-TAX COST OF DEBT 15. rd = ( 1 - T )