- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 6. Capital Structure
- Subject 4. Optimal Capital Structure
CFA Practice Question
The objective of the firm should be to ______ when choosing a capital structure.
B. choose one that minimizes the firm's WACC
C. choose any capital structure since capital structure is always irrelevant
A. choose one that results in the largest interest tax shield
B. choose one that minimizes the firm's WACC
C. choose any capital structure since capital structure is always irrelevant
Correct Answer: B
Given the tax deductibility of interest, adding leverage increases firm value to a point but also increases the risk of default for capital providers who demand higher returns in compensation. To maximize firm value, management should target the optimal capital structure that minimizes the company's WACC.
User Contributed Comments 1
| User | Comment |
|---|---|
| DonAnd | I narrowed it down to B or E and it definitely won't be E so voila B it is. :-) |