CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Gigantic Corporation has calculated the following:

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
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