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Flashcards in Chapter 9 Deck (34)
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1
Q

Represents the firms cost of financing and is the minimum rate of return that a project must earn to increase firm value.

A

Cost of capital

2
Q

Investments with a rate of return _____ cost of capital will increase the value of the firm. In contrast, projects with a rate of return _____ cost of capital decrease the firm value.

A

Increase, decrease

3
Q

Acts as a major link between the firms long term investment decisions and the wealth of the firms owners as determined by the market value of their shares.

A

Cost of capital

4
Q

By weighting the cost of each source of financing by its relative proportion in the firms target capital structure, the firm can obtain a

A

Weighted average cost of capital.

5
Q

Process of evaluating and selecting long term investments.

A

Capital budgeting.

6
Q

Four basic sources of long term capital for firms:

A

Long term debt, preferred stock, common stock and retained earnings.

7
Q

Financing cost associated with new funds raised through long term borrowing.

A

Cost of long term debt

8
Q

Funds actually received by the firm from the sale of a security.

A

Net proceeds

9
Q

Total costs of issuing and selling a security.

A

Flotation costs

10
Q

Flotation costs include two components

A

Underwriting costs and administrative costs

11
Q

Compensation earned by investment bankers for selling the security

A

Underwriting costs

12
Q

Issuer expenses such as legal and accounting costs.

A

Administrative costs

13
Q

Rate of return the firm must pay on new borrowing.

A

Before tax cost of debt

14
Q

Must account for the tax savings created by debt and solve for cost of long term debt on an after tax basis. Can be found by multiplying the before tax cost by (1-tax rate)

A

After tax cost of debt

15
Q

When dividends are stated as __________ the stock is often referred to as x dollar preferred stocks.

A

Preferred stock dividend.

16
Q

Sometimes preferred stock dividends are stated as _____________. This rate represents the percentage of the stocks par, or face value that equals the annual dividend.

A

Annual percentage rate.

17
Q

Ratio of preferred stock dividend to the firms net proceeds from the sale of preferred stock.

A

Cost of preferred stock

18
Q

Return required on the stock by investors in the marketplace.

A

Cost of common stock

19
Q

2 types of common stock financing:

A

Retained earnings and new issues of common stock.

20
Q

Rate of which investors discount the expected dividends of the firm to determine its share value.

A

Cost of common stock equity

21
Q

Assumed that the value of a share of stock equals the present value of all future dividends (assumed to grow at a constant growth) that it is expected to provide over an infinite time horizon.

A

Constant growth valuation (Gordon growth) model

22
Q

Describes the relationship between the required return and the nondiversifiable risk of the firm as measured by the beta coefficient

A

Capital asset pricing model (CAPM)

23
Q

The CAPM technique differs from the constant growth valuation model in that it directly considers the firms ____ as reflected by beta, in determining the required return or cost of common stock equity.

A

Risk

24
Q

When the constant growth valuation model is used to find the cost of common stock equity, it can easily be adjusted for _______ to find the cost of new common stock.

A

Flotation costs.

25
Q

The same as cost of an equivalent fully subscribed issue of additional common stock, which is equal to the cost of common stock equity

A

Cost of retained earnings

26
Q

Cost of common stock, net underpricing and associated flotation costs.

A

Cost of a new issue of common stock

27
Q

Stock sold at a price below its current market price

A

Underpriced

28
Q

The cost of new issues will always be greater than the cost of ____ issues, which is equal to the cost of retained earnings.

A

Existing

29
Q

The cost of new common stock is normally greater than

A

Any other long term financing cost

30
Q

Reflects the expected average future cost of capital over the long run; found by weighting the cost of each specific type of capital by its proportion in the firms capital structure.

A

Weighted average cost of capital (WACC)

31
Q

Weights that use accounting values to measure the proportion of each type of capital in the firms financial structure.

A

Book value weights

32
Q

Weights that use market values to measure the proportion of each type of capital in the firms financial structure.

A

Market value weights

33
Q

Either book or market value weights based on actual capital structure proportions.

A

Historical weights

34
Q

Either book or market value weights based on desired capital structure proportions

A

Target weights