The CFA® Level 1 Exam Preparation Guide

CFA® Level 1 Exam: Important Statements

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Question

Which of the following statements is most correct?

Answers

A. None of these answers.

B. All else equal, an increase in a company's stock price will increase the marginal cost of retained earnings.

C. All of these answers.

D. All else equal, an increase in a company's stock price will increase the marginal cost of issuing new common equity.

E. If a company's tax rate increases, but the yield to maturity of its noncallable bonds remains the same, the company's marginal cost of debt capital will fall.

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Explanations

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A. B. C. D. E.

The debt cost used to calculate a firm's WACC is k(d)(1 - T).

If k(d) remains constant but T increases, then the term (1 - T) decreases and the value of the entire equation, k(d)(1 - T), decreases. k(d)(1 - T) = after-tax component cost of debt, where T is the firm's marginal tax rate.

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