CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Gigantic Corporation has calculated the following:

WACCs = 5.75%
WACCe = 6.15%
REBP = $35,750,000

Which of the following correctly matches new capital to be raised with MCC?

A. $35,750,000 in new capital; MCC = 5.75%
B. $35,750,000 in new capital; MCC = 6.15%
C. $40,000,000 in new capital; MCC = 5.75%
Correct Answer: B

Since $35,750,000 in new capital exhausts retained earnings, the next dollar of capital will be raised at WACCe. As a result, the MCC at $35,750,000 is WACCe = 6.15%.

User Contributed Comments 12

User Comment
wroger what does REBP stands for?
mattl31 Retained Earnings Breakpoint
anish Why do we need to raise new capital equal to the REBP??
dlo1 The question requires some clarification. $35,750,000 is the amount of capital that could be raised without issuing new stock. Hence, after this amount of capital is raised and used on a new project, then the MCC would jump up to 6.15%, representing the added flotation costs in raising external equity.
thekapila I think since Retained earnings = 35,750,000. and if you invest all these REBP then you should atleast get return equal to WACC(E) which is 6.15 % as will be required by shareholders.
hannovanwyk the formula for retained earnings break point is :

REBP = (retained earnings/equity fraction)

which i had to go find in my 3rd year financial management text book.
dvallejo Guys, what is the different between WACC(S) and WACC(E)
leon121 I have the same question as dvallego...what's the difference between WACC s and WACC e
J0rdanl Not sure why 's' and 'e' are used as opposed to other letters - but I think it's the WACC before the BP and the WACC after
J0rdanl WACCe = WACC with equity BP?
Salim6 I think it's WACC Start and WACC End
Metatroz Well very unclear question... reshape it please...
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