Corp finance

CFA Level II
#1

After careful consideration of many alternatives, the strategy team suggests reducing the dividend payout ratio of Elemetrics from 40% to 20%. Despite how variable earnings can be, the team believes the additional earnings retained by the firm will reduce the proportion of debt to target levels in a five-year period and reduce the cost of equity as the debt is decreased.

incorrect, because propositions I and II are violated. incorrect, because proposition I is violated. correct.

How is propositions I and II are violated wrong??? Then what’s the answer?

#2

Changing capital structure does not increase shareholder value.

#3

So the answer is C?

#4

C is the answer, changing the capital structure definitely affects the cost of equity and debt, but it does not affect the WACC, WACC remains the same, so no violation has occured.

#5

Elemetrics isn’t a real word… The CFA mocks can be so cruel…