Please answer three questions about the cost of capital.

1. Introductory concept: A; A; E Term Description Capital components A. The average rate paid bv a rm to secure the outstanding nancial capital used to acquire the firm's assets. This concept maintains that the rm's retained earnings should generate a return for the rm'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 n'n's common stock. Breakpoint The elements in a nn's capital structure. The minimum return that must be earned on a rm's investments to ensure that the iin'n's value does not decrease. Target capital structure Flotation costs The cost associated with a rm's borrowed nancial 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 nancial securities. Weighted average cost of capital The average cost of the next dollar of nancial capital raised by a rm. Cost of debt The point along the firm's marginal cost of capital [MEG] curve or schedule at which the MCC increases. uuuuuuuuuu A mi'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 ows From dividends and capital gains. Bond-vieid-plus-risk-premium approach This rnelhod assumes that the |:| rm's cost of eguit'i.r is related to its cost of debt. of the market's riskfree rate and the product of the stock's beta coefcient and the market's risk premium. 11. Basic concepts regarding the weighted average cost of capital {WAGE} M Ail a which of the following statements about a firm's capital oomponents and its weighted average oost of capital {WACC} are true? Check all that apply. I:I A firm's oomponent costs of capital are determined by members of the board of directors, who are elected by the investors who provide funds to the firm. I:| The oomponent oosts of capital represent the rates of return that the firm pays to use various type of funds that are provided by investors. I:| The cost of capital. or required rate of return. that a firm should use when making an investment decision is calculated as a weighted average. or oom bination, of the various types of funds generally used. regardless of which specic type of financing the firm plans to use to fund the project if it is purchased. I:I The oost of retained earnings, r5, for a particular firm is greater than the oost of new equity. re, because retained earnings represent inoome that oould have been paid to stockholders in the form of dividends. As a result, stockholders require a much higher rate of return when the firm retains earnings than when it issues new stock