CFA Level 1: CFA Level 1 Exam - Most Correct Statement

Most Correct Statement in CFA Level 1 Exam

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Question

Which of the following statements is most correct?

Answers

A. All of these statements are false.

B. A break point is based on the dollar value used of a specific type of capital, and occurs at the point where the cost of that capital type increases. Thus, if a firm has $100,000 in earnings, and stockholders want $50,000 of those earnings paid as dividends, then retained earnings will have two break points.

C. A firm facing a steep demand curve (that is, high flotation costs) for new equity would likely also face, at some point, a steeply upward sloping WACC curve.

D. All of these statements are correct.

E. One purpose of calculating the WACC (Weighted Average Cost of Capital) is to have a singular cost of capital measure that can be applied to evaluate all of the firm's projects, including those of greater than and lesser than average risks.

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Explanations

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A. B. C. D. E.

Because of high flotation costs, dollars raised by selling new stock must work harder than dollars raised by retaining earnings. Steep demand would result in a steeply upward sloping WACC curve. Note, however, that for most firms, new equity issues are rare.

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