The mix of debt, preferred stock and common equity the firm plans to raise to fund its future projects.
What is a firm's target capital structure?
100
The rate of return investors require on the firm's preferred stock.
What is the cost of preferred stock?
100
1) Interest rates in the economy
2) The general level of stock prices
3) Tax rates
What are the three most important factors that the firm cannot directly control?
100
The process of planning expenditures on assets with cash flows that are expected to extend beyond one year.
What is capital budgeting?
100
The discount rate that forces a project's NPV to equal zero.
What is the internal rate of return (IRR)?
200
One of the types of capital used by firms to raise funds.
What is a capital component?
200
The rate of return required by stockholders on a firm's common stock.
What is the cost of retained earnings?
200
1) Changing its capital structure
2) Changing its dividend payout ratio
3) Altering its capital budgeting decision rules
What are three ways a firm can directly affect its cost of capital?
200
A long-run plan that outlines in broad terms the firm's basic strategy for the next 5 to 10 years.
What is a strategic business plan?
200
1) Trial and error
2) Calculator
3) Excel
What procedures/methods can be used to find IRR?
300
A weighted average of the component costs of debt, preferred stock, and common equity.
What is the weighted average cost of capital (WACC)?
300
The cost of external equity based on the cost of retained earnings but increased for flotation costs.
What is the cost of new common stock?
300
A minimum requirement for the expected return on a project.
What is a "hurdle rate"?
300
A method of ranking investment proposals using the present value of the project's free cash flows discounted at the cost of capital.
What is net present value (NPV) analysis?
300
The situation where a project has two or more IRRs.
What are multiple IRRs?
400
The interest rate the firm must pay on new debt.
What is the before-tax cost of debt?
400
The percentage cost of issuing new common stock.
What is the flotation cost?
400
Each project's hurdle rate should reflect the risk of the project, not the risk associated with the firm's average project as reflected in its composite WACC.
How should firms evaluate projects with different risks?
400
Projects with cash flows that are not affected by the acceptance or non-acceptance of other projects.
What are independent projects?
400
A graph showing the relationship between a project's NPV and the firm's cost of capital.
What is an NPV profile?
500
The relevant cost of new debt, taking into account the tax deductibility of interest; used to calculate WACC.
What is the after-tax cost of debt?
500
1) Add flotation costs to a project's cost.
2) Increase the cost of capital.
What are the two approaches that can be used to adjust for flotation costs?
500
1) Depreciation-generated funds
2) Privately owned firms
3) Measurement problems
4) Costs of capital for projects of differing risks
5) Capital structure weights
What problems arise in estimating the cost of capital?
500
A set of projects where only one can be accepted.
What are mutually exclusive projects?
500
The cost of capital at which the NPV profiles of two projects cross and thus, at which the projects' NPVs are equal.