Financial Management Final Exam Review – Complete Study Guide &
Practice Test (2026)
cost of capital - ANS ✔✔the firm's cost of financing; the minimum rate of return that a project
must earn to increase firm value
cost of debt - ANS ✔✔financing cost associated with new funds through long-term borrowing
net proceeds - ANS ✔✔the funds actually received by the firm from the sale of a security;
equals selling price - flotation costs
flotation costs - ANS ✔✔the total costs of issuing and selling a security. 2 kinds: underwriting
costs and administrative costs
underwriting costs - ANS ✔✔a flotation cost; compensation earned by investment bankers for
the selling of a security
administrative costs - ANS ✔✔a flotation cost; issuer expenses such as legal, accounting, and
printing
cost of preferred stock - ANS ✔✔the ratio of the preferred stock dividend to the firm's net
proceeds (selling price - floating costs); equals D/ NP
cost of common stock equity - ANS ✔✔the rate at which investors discount the expected
dividends of the firm to determine its share value
constant-growth valuation (Gordon model) - ANS ✔✔valuation of common stock for a dividend
paying company; assumes that the value of a share of stock equals the present value of all
future dividends that it is expected to provide over an infinite life time
, cost of retained earnings - ANS ✔✔equal to the cost of common stock equity
capital asset pricing model (CAPM) - ANS ✔✔describes the relationship between the required
return and the nondiversifiable risk of the firm as measured by beta
cost of new common stock - ANS ✔✔the cost of common stock, net of underpricing and
associated floating costs
underpriced - ANS ✔✔if the stock is sold at a price below its current market price
weighted average cost of capital (WACC) - ANS ✔✔reflects the expected average future cost of
capital over the long run; found by weighting the cost of each specific type of capital by its
proportion in the firm's capital structure
book value weights - ANS ✔✔weights that use accounting values to measure the proportion of
each type of capital
market value weights - ANS ✔✔weights that use market values to measure the proportion of
each type of capital
historical weights - ANS ✔✔either book or market value weights based on ACTUAL capital
structure proportions
target weights - ANS ✔✔either book or market value weights based on DESIRED capital
structure proportions
capital budgeting - ANS ✔✔the process of evaluating and selecting long-term investments that
are consistent with the firm's goal of maximizing owner wealth
Practice Test (2026)
cost of capital - ANS ✔✔the firm's cost of financing; the minimum rate of return that a project
must earn to increase firm value
cost of debt - ANS ✔✔financing cost associated with new funds through long-term borrowing
net proceeds - ANS ✔✔the funds actually received by the firm from the sale of a security;
equals selling price - flotation costs
flotation costs - ANS ✔✔the total costs of issuing and selling a security. 2 kinds: underwriting
costs and administrative costs
underwriting costs - ANS ✔✔a flotation cost; compensation earned by investment bankers for
the selling of a security
administrative costs - ANS ✔✔a flotation cost; issuer expenses such as legal, accounting, and
printing
cost of preferred stock - ANS ✔✔the ratio of the preferred stock dividend to the firm's net
proceeds (selling price - floating costs); equals D/ NP
cost of common stock equity - ANS ✔✔the rate at which investors discount the expected
dividends of the firm to determine its share value
constant-growth valuation (Gordon model) - ANS ✔✔valuation of common stock for a dividend
paying company; assumes that the value of a share of stock equals the present value of all
future dividends that it is expected to provide over an infinite life time
, cost of retained earnings - ANS ✔✔equal to the cost of common stock equity
capital asset pricing model (CAPM) - ANS ✔✔describes the relationship between the required
return and the nondiversifiable risk of the firm as measured by beta
cost of new common stock - ANS ✔✔the cost of common stock, net of underpricing and
associated floating costs
underpriced - ANS ✔✔if the stock is sold at a price below its current market price
weighted average cost of capital (WACC) - ANS ✔✔reflects the expected average future cost of
capital over the long run; found by weighting the cost of each specific type of capital by its
proportion in the firm's capital structure
book value weights - ANS ✔✔weights that use accounting values to measure the proportion of
each type of capital
market value weights - ANS ✔✔weights that use market values to measure the proportion of
each type of capital
historical weights - ANS ✔✔either book or market value weights based on ACTUAL capital
structure proportions
target weights - ANS ✔✔either book or market value weights based on DESIRED capital
structure proportions
capital budgeting - ANS ✔✔the process of evaluating and selecting long-term investments that
are consistent with the firm's goal of maximizing owner wealth
