Foundations of Financial Management Study Set 5
Quiz 11: Cost of Capital
In Determining the Cost of Debt, Yields and Prices of Outstanding
In determining the cost of debt, yields and prices of outstanding bonds are used.
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In determining the cost of preferred stock, the dividend yield on outstanding preferred stock may be used as a proxy.
According to traditional financial theory, the cost of capital curve is U-shaped over the range of debt-equity mixes.
The out-of-pocket cost of common stock is a good approximation of the cost of common stock equity.
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