- CFA Exams
- CFA Exam: Level I 2021
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 1. Cost of Capital
CFA Practice Question
Which of the following statements about the WACC is true?
B. The optimal capital structure is the one that maximizes the WACC.
C. The value of the firm will be maximized when the WACC is minimized.
D. The WACC is virtually impossible to compute for a firm that has multiple divisions.
E. Since discount rates and values move in the same direction, minimizing the WACC will minimize the value of the firm's cash flows.
A. The WACC is the appropriate discount rate for all new projects being considered by the firm.
B. The optimal capital structure is the one that maximizes the WACC.
C. The value of the firm will be maximized when the WACC is minimized.
D. The WACC is virtually impossible to compute for a firm that has multiple divisions.
E. Since discount rates and values move in the same direction, minimizing the WACC will minimize the value of the firm's cash flows.
Correct Answer: C
User Contributed Comments 10
| User | Comment |
|---|---|
| katybo | min wacc -> max stock price |
| msns | Why not A |
| thud | Because it's not for all new projects, but only for those with similar levels of risk. |
| sheenalim | why not D? |
| VGVG | sheenalim - because WACC doesn't depend on internal divisions of firm. A may not be true since it mentions "all projects" whereas WACC is only applicable to "capital" projects. Some projects may not be capital intensive. |
| JoeHoong | I think C is false if we assume a firm can still accept additional projects/make new investments. By taking on more debt/equity (thereby increasing WACC) and using the capital to invest in projects with a return higher than WACC, the value of the firm will increase.. |
| hks101 | Not A because the projects should be discounted at the risk of the project. When you don't know how to discount based on the risk of the project, then it's ok to use WACC (in which case is the cost of borrowing) |
| DonAnd | If you get Ques 14 correct then you should get Ques 15 correct. They basically say the same thing... |
| shash0678 | Why is B incorrect - optimal capital structure is the one which minimizes WACC? |
| Yrazzaq88 | Because the optimal capital structure will have the most minimal WACC. Remember, WACC is your Weight Average Cost of Capital. Key word, "Cost". Less cost = More optimal. |