WACC is an abbreviation for the weighted-average cost of capital.

True

False

The target capital structure is the mix of financing which minimizes the weighted average cost of capital of the firm.

True

False

There is no difference between the cost of new external common equity and the cost of common stock.

True

False

Dividends are an example of flotation costs.

True

False

High flotation costs reduce the difference between an investor's required returns and the cost of capital to the firm.

True

False

Match the following terms to their descriptions.

A. The after-tax average cost of the firm's investor supplied capital.

B. The minimal acceptable return on a stock given its risk characteristics

C. The return that fairly compensates an investor for purchasing or holding debt taking into account its risk, duration and liquidity.

D. The mix of debt, preferred stock and equity which minimizes the firm's WACC.

E. The commissions, legal expenses and other costs incurred by a firm when it issues new securities.

F. The extra return investors require to invest in the market portfolio rather than investing in a risk free asset.

G. The cost to the firm of providing the return required by the firm's common stockholders.

H. The proportion of annual net income not paid out to shareholders as dividends or stock re-purchases.

I. The cost to the firm of issuing new preferred stock.

J. A hybrid security with some characteristics similar to debt and some characteristics similar to equity.

selectABCDEFGHIJ	1. Flotation cost
selectABCDEFGHIJ	2. Target capital structure
selectABCDEFGHIJ	3. Preferred stock
selectABCDEFGHIJ	4. Required return on debt
selectABCDEFGHIJ	5. Required return on stock
selectABCDEFGHIJ	6. Market risk premium
selectABCDEFGHIJ	7. Retention ratio
selectABCDEFGHIJ	8. Weighted average cost of capital
selectABCDEFGHIJ	9. Cost of common equity
selectABCDEFGHIJ	10. Cost of preferred stock