CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Which of the following statements regarding the weighted average cost of capital formula is false?
A. It requires knowledge of the required return on the firm if it is all-equity financed.
B. It assumes the project finances are a carbon copy of the firm's.
C. It can be used to take account of issue costs and other such financing side effects.

User Contributed Comments 10

User Comment
Florence I think it also requires knowledge of the required return even the firm is not all-equity financed.
murli Good one! assuming WACC means WACC of the firm means assuming carbon copy of the firm!
yanpz Why is it false? If it's not assumed a project is a copy of the company, it can't use WACC.
armanaziz to answer yanpz - WACC formula doesn't say that WACC has to be applied for all projects. Project cost of capital may be higher or lower based on project risk.
todolist good Q. Project WACC different from the firm's WACC.
xanados WACC doesn't require knowledge of what the firms cost of equity would be if there were no leverage. The cost components of WACC can change depending on the mix of financing. If a company is in financial distress from a high debt load, the cost of equity is going to be very high, and, importantly, you don't need to know what that cost would be without the distress in order to use WACC. You only need to know what the marginal cost of new equity capital would be.
supersimps WACC is adjusted up or down for projects that have a different risk than the company undertaking it. You can still use WACC - just not the company's unadjusted WACC.
challenge10 I believe it's the 'carbon copy' term that is putting everyone off. The book says WACC assumes the project equals the average risk project of the firm. Agreed that you do not need to know the unlevered cost of equity as that would be incorporated in the marginal cost of equity.
alles The question asks about the wacc FORMULA. The wacc can be used to take account of issue costs, but not the wacc FORMULA.Inputting flotation costs in the wacc formula would be the "incorrect treatment of flotation costs". So C is also false in my opinion.
heshamessa i think alles is correct, that what i can understand.
because incorporating issue costs in wacc is incorrect treatment
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