. Introductory concept: A; A; E Term Description Capital components A. The average rate paid bv a firm to secure the outstanding financial capital used to acquire the firm’s assets. This concept maintains that the firm’s retained earnings should
1. Introductory concept: A; A; E Term Description Capital components A. The average rate paid bv a firm to secure the outstanding financial capital used to acquire the firm’s assets. This concept maintains that the firm’s retained earnings should
generate a return for the firm’s shareholders. Investment op portunitv
schedule itirsprrrtunitirr cost principle The combination of debt, preferred stock, and common 3.1in that will maximize the value of the fin‘n’s common stock. Breakpoint The elements in a finn’s capital structure. The minimum return that must be earned on a firm’s
investments to ensure that the iin’n’s value does not decrease. Target capital structure Flotation costs The cost associated with a firm’s borrowed financial capital. Marginal cost of capital Mable or graph of a firm’s potential investments listed in decreasing order ul’ their internal rules of reLurII. Cost of capital The costs associated with issuing new financial securities. Weighted average cost of
capital The average cost of the next dollar of financial capital raised by
a firm. Cost of debt The point along the firm’s marginal cost of capital [MEG] curve or schedule at which the MCC increases. uuuuuuuuuufi A fimi’s cost of retained earnings. or internal equity. can be estimated using a varietv of methods. Match the formula
andfor the term to its corresponding description. Estimation method Description III The cost is alarmed ht |:I discounting the stock’s expected future cash flows From dividends
and capital gains. Bond-vieid-plus-risk-premium approach This rnelhod assumes that the |:| firm’s cost of eguit‘i.r is related to its cost of debt. of the market’s risk—free rate and the product of the stock’s beta
coefficient and the market’s risk
premium.
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