- CFA Exams
- CFA Exam: Level I 2021
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 6. Marginal Cost of Capital Structure
CFA Practice Question
Gigantic Corporation has calculated the following:
WACCe = 6.15%
REBP = $35,750,000
B. $35,750,000 in new capital; MCC = 6.15%
C. $40,000,000 in new capital; MCC = 5.75%
WACCs = 5.75%
WACCe = 6.15%
REBP = $35,750,000
Which of the following is the correct amount of new capital to be raised using MCC?
A. $35,750,000 in new capital; MCC = 5.75%
B. $35,750,000 in new capital; MCC = 6.15%
C. $40,000,000 in new capital; MCC = 5.75%
Correct Answer: B
Since $35,750,000 in new capital exhausts retained earnings, the next dollar of capital will be raised at WACCe. As a result, the MCC at $35,750,000 is WACCe = 6.15%.
User Contributed Comments 7
| User | Comment |
|---|---|
| yu0825 | What is REBP? |
| Beret | REBP = retained earnings breakpoint. The point in funding new projects where the firm exhausts or uses up the retained earnings is called the retained earnings breakpoint. At the breakpoint, the WACC changes because the firm must issue new common stock (which is more expensive than retained earnings due to flotation costs) in order to continue funding projects. |
| tschorsch | Is WACC[s] the cost for retained earnings and WACC[e] the cost for issuing new equity? |
| DariSH | What is WACCs? |
| DonAnd | weighted average cost of capital (knock knock!!!!) |
| thekobe | dondand hahahahaha, youre really funny |
| jagp | It's WACC start DariSH |