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Basic Question 6 of 14
Which of the following is NOT correct? (Note: tc is the marginal tax rate.)
B. The WACC requires the cost of debt be decreased by tc.
C. The WACC is not directly observable in financial markets.
D. The WACC is the required return on any investments a firm makes that have a level of risk equal to that of present operations.
E. The WACC represents the risk and target capital structure of a firm's existing assets as a whole.
A. The WACC is equal to the firm's embedded debt cost multiplied by (1 - tc).
B. The WACC requires the cost of debt be decreased by tc.
C. The WACC is not directly observable in financial markets.
D. The WACC is the required return on any investments a firm makes that have a level of risk equal to that of present operations.
E. The WACC represents the risk and target capital structure of a firm's existing assets as a whole.
User Contributed Comments 9
| User | Comment |
|---|---|
| rockeR | Can someone explain why answer C is correct? |
| haarlemmer | WACC is a combined rate. |
| bahodir | C is correct, because WACC is a company specific rate, which is not directly observable in financial markets. |
| thekapila | well it can be observed in financial markets... As said the WACC if not known can be calculated as market value of firms debt and equity which can very well observed in market. |
| tschorsch | C is correct because WACC cannot always be calculated. Debt (including bank loans) may have been issued which in not on the market and thus the actual terms of this debt may not be available, i.e. they must be estimated. |
| dipu617 | Why A is not correct??!! |
| bantoo | It tells partial truth and talks nothing about cost of equity. |
| gulfa99 | WACC is not equal to embedded debt cost. WACC is the weighted average cost of Preferred, Debt + Equity. While calculating WACC you can reduce the taxable rate from debt cost and not from equity and preferred. |
| quanttrader | + cost of equity |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret the weighted-average cost of capital for a company
CFA® 2024 Level I Curriculum, Volume 2, Module 6.