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DeHan Fin. Ch. 11 V

Finance Ch. 11 Vocab

TermDefinition
Required Rate of Return/Opportunity Cost Rate The return that must be earned on investment funds to cover the cost of financing such investments.
Cost of Capital The firm's average cost of funds, which is the average return required by the firm's investors--what must be paid to attract funds.
Capital Components The particular types of capital used by the firm--that is, its debt, preferred stock, and common equity.
After-Tax Cost of Debt The relevant cost of new debt, taking into accounting the tax deductibility of interest.
Cost of Preferred Stock The rate of return investors require on the firm's preferred stock.
Cost of Retained Earnings The rate of return required by stockholders on a firm's existing common stock.
Cost of New Common Equity The cost of external equity; based on the cost of retained earnings, but increased for floatation costs.
Floatation Costs The expenses incurred when selling new issues of securities.
Target Capital Structure The combination (%) of debt, preferred stock, and common equity that will maximize the price of the firm's stock.
Weighted Average Cost of Capital (WACC) A weighted average of the components of debt, preferred, stock, and common equity.
Marginal Cost of Capital (MCC) The cost of obtaining another dollar of new capital; the weighted average cost of the last dollar of new capital raised.
MCC Schedule A graph that relates the firm's weighted average cost of each dollar of capital to the total amount of new capital raised.
Break Point (BP) The dollar value of new capital that can be raised before an increase in the firm's weighted average cost of capital occurs.
Investment Opportunity Schedule (IOS) A graph of the firm's investment opportunities ranked in order of the projects' internal rates of return.
Created by: sfrase
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