CFA® Level 1: CFA® Level 1

Which statement is most correct?

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Question

Which of the following statements is most correct?

Answers

A. All of these answers are correct.

B. An increase in the risk-free rate is likely to decrease the marginal cost of both debt and equity financing.

C. The WACC is calculated on a before-tax basis.

D. None of these answers are correct.

E. The WACC (Weighted Average Cost of Capital) for a given capital budget level is a weighted average of the marginal cost of each relevant component which makes up the firm's target capital structure. E

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Explanations

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A. B. C. D. E.

Explanation

A value-maximizing firm will establish a target (optimal) capital structure and then raise new capital in a manner that will keep the actual capital structure on target over time. The target proportions of debt, preferred stock, and common equity, along with the component cost of capital, are used to calculate the firm's WACC.

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