- CFA Exams
- CFA Level I Exam
- Topic 4. Corporate Issuers
- Learning Module 34. Capital Structure
- Subject 3. Optimal and Target Capital Structure

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**CFA Practice Question**

Which of the following is true about the WACC?

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

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

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**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. |