Match term with the description: Breakpoint O The amount of capital expenditures made, or to be...

Question:

Match term with the description:

Breakpoint

  1. O The amount of capital expenditures made, or to be made, at which the Firm's marginal cost of capital increases.
  2. O The return required by providers of capital loaned to the firm.
  3. O The average cost of a firm's financial capital when averaged across all of its outstanding debt and equity capital.
  4. O This concept argues that a firm's retained earnings are not free to the firm.
  5. O A firm's shareholder wealth-maximizing combination of debt, and common and preferred stock.
  6. O These costs are generally expressed as a percentage of the total amount of securities sold, including the costs of printing the security certificates, applicable taxes, and issuance and marketing fees.
  7. O A table or graph of a firm's potential investments listed in decreasing order of their internal rates of return.
  8. O The weighted average cost of the last dollar raised by a firm, or the firm's incremental cost of capital.
  9. O This term refers to the individual sources of the firm's financing, including its debt, preferred stock, retained earnings, and newly issued common equity.
  10. O The minimum return that must be earned on a firm's investments to ensure that the firm's value does not decrease.

Cost of Capital Breakpoint:

This question deals with the cost of capital. More specifically, it calls for an understanding of the concept of a breakpoint. A breakpoint is the amount of capital that can be raised before an increase in a firm's cost of capital, as quantified by the weighted average cost of capital, occurs. A firm can have multiple breakpoints, each of which indicates a successively higher cost of capital resulting from the increased use of external financing.

Answer and Explanation:

Some of the answers provided are closely related, making the determination of the correct answer difficult. However, thoughtfully assessing the language reveals one answer which is clearly more appropriate than the others. The correct answer, which accurately describes a "breakpoint," is as follows:

"The amount of capital expenditures made, or to be made, at which the Firm's marginal cost of capital increases."


Learn more about this topic:

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Capital Structure & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 15 / Lesson 1
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