CFAI mock 2011 afternoon question

CFA Level II
#1

In question 59, why replacing debt with preferred stock will increase the firm’s cost of capital thereby lowering its EVA?

#2

Least Likely.

#3

i am asking why it is lowering?

#4

EVA is NOPAT - $ WACC

when you look at the first paragraph it clearly says that DEBT RATIO IS WELL BELOW OPTIMAL LEVEL

if you keep reducing debt ( by paying debt with capital ) you keep going away from optimal level, you keep raising WACC , you keep raising $WACC, you keep reducing EVA…

#5

thanks for the reply, now i get it

#6

I found the last two cases in this test are pretty diffcult. I did it last night and used appr. 1hr to finish these two cases.

Still, I made 6 mistakes in them. I am gonna check again tonite.