CFA Practice Question

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CFA Practice Question

Which of the following is true about the WACC?

I. The WACC is the appropriate discount rate for all new projects being considered by the existing firm
II. The optimal capital structure is the one that maximizes the WACC
III. The value of the firm will be maximized when the WACC is minimized
IV. The WACC is virtually impossible to compute for a firm that has multiple divisions
V. 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: III

User Contributed Comments 3

User Comment
katybo min wacc -> max stock price
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.
nigelyang7 Can anyone provide a explanation about why I is wrong? Thanks.
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