CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Which of the following statements is false?
A. The optimal capital structure is the mix of debt and equity (common and preferred stock) that maximizes a firm's value.
B. The optimal capital structure is what a value-maximizing firm wants to use, as a long-run objective.
C. A value-maximizing firm will never have a capital structure different from the optimal capital structure.
Explanation: Short-term deviations from the target capital structure are not uncommon and can be caused by fluctuations in interest rates and stock prices. Firms would typically adjust somewhat slowly to those target levels.

User Contributed Comments 4

User Comment
murli Because, optimal capital structure is a target to be achieved and maintained over time.
Rivermax Does the optimum capital structure always have to be a mix of debt and equity? What if the firm could achieve a lower WACC through just one of the instruments?
hon132 @rivermax, having just one or the other implies a full debt or full equity structure. Having no stock means it's a private firm and having no debt is unrealistic to growth when equity is usually more expensive and requires dilution of ownership.
Albireo I took a 'lucky guess'. I heard someone on YouTube say that any answer that says 'never' or 'always', it is wrong. Easy marks. Not sure if it applies to every single question, but it is a guesstimate if you are completely unsure (as I was in this question!).
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