CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Which of the following statements is correct?
A. A firm's cost of capital is not affected by the firm's investment policies.
B. A firm's cost of capital is affected by the firm's investment policies but is independent of the firm's financing policies.
C. A firm's cost of capital is affected by both the firm's financing and investment policies.
Explanation: Both financing and investment policies affect the cost of capital. The investment policy determines the riskiness of the firm's assets, and therefore the required returns on debt and equity. The financing policies affect the cost of debt by determining the relative amounts of outstanding debt and equity, as well as the risk of default.

User Contributed Comments 4

User Comment
danlan Business risk and financial risk, so both.
sanyukta god i was thinking of MM
Lamkerst WACC depends on weights and returns.
Investment policy => Risk => Returns
Financial policy => amounts of debt and equity => weights
serboc marginal cost of capital curve
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