Description Term Answer Capital components The amount of capital expenditures made, or to be made, at A. which the firm's marginal cost of capital increases. Investment opportunity The return required by providers of capital loaned to the firm. B. schedule Opportunity cost principle The average rate paid by a firm to secure the outstanding C. financial capital used to acquire the firm's assets. Breakpoint This concept maintains that the firm's retained earnings should D. generate a return for the firm's shareholders. Target capital structure A firm's shareholder wealth-maximizing combination of debt, E. and common and preferred stock. Flotation costs The costs associated with issuing new financial securities. F. Marginal cost of capital A table or graph of a firm's potential investments ranked from G. the highest internal rate of return to the lowest. H Cost of capital The weighted average cost of the last dollar raised by a firm, or the firm's incremental cost of capital. Weighted average cost of This term refers to the individual sources of the firm's financing, including its debt, preferred stock, retained earnings, and newly issued common equity I. capital Cost of debt The minimum return that must be earned on a firm's J. investments to ensure that the firm's value does not decrease A firm's cost of retained earnings, or internal equity, can be estimated using a variety of methods. Match the formula and/or the term to its corresponding description Description Estimation method Formula The cost is calculated by discounting the stock's expected future cash flows from dividends and capital gains. Bond-yield-plus-risk-premium approach This method assumes that the firm's cost of equity is related to its cost of debt. =FRF Bs (rM The cost is calculated as the sum rRF) rs of the market's risk-free rate and the product of the stock's beta coefficient and the market's risk premium