- CFA Exams
- CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 1. Cost of Capital
CFA Practice Question
Which statement(s) is (are) correct?
II. The WACC is based on market values of debt and equity if the target capital structure is unknown.
III. The WACC is the correct cost of capital to use in capital budgeting.
I. A value-maximizing firm will raise new capital in a manner consistent with its target capital structure.
II. The WACC is based on market values of debt and equity if the target capital structure is unknown.
III. The WACC is the correct cost of capital to use in capital budgeting.
A. I, II and III
B. I and III
C. II and III
User Contributed Comments 3
| User | Comment |
|---|---|
| MathW | It doesn't make sense to me to say that WACC is based on market values if the target capital structure is unknown. If you click on the Check LOS, it explains "that is, the target capital structure is based on the current capital structure." That seems clear, but how is it synonymous with being based on market values on debt? |
| mazen1967 | If you don't know the target capital structure, use the existing market value. The answer is correct. |
| edrei7 | As analysts, we won't always know the actual values of the capital structure unless we have inside information. We can only estimate through the market. |