Confidence boosters (easy and straightforward :-))

CFA Level II
#41

Heh gauravku… such a trouble maker. =)

#42

This was the explanation --------------------------- Correct answer: The mix of debt, preferred and common equity that causes the stock price to be maximized. > Rationale: TFCs target or optimal capital structure is the mix of debt, preferred and common equity that causes the stock price to be maximized. A value-maximizing firm tries to raise new capital in a manner that keeps the actual capital structure at its optimal or target capital structure over time. ---------------------------------------- However, I am sure that they gave the other answer yesterday. may be they were also confused.

#43

i think the answers can be considered soft if they aren’t given by CFA association themselves, and then of course they get things wrong/poorly worded too. but honestly, one of us might be writing questions in a few years for a seminar or something. and that’s all it is - making them up. i’m ok. with either answer. but of course, i’m not ok with 2-answer questions on the exam.

#44

Sorry but I think you’re either joking or it’s a mistake :slight_smile: What about pecking order theory of capital structure? That would say that might use internal equity to fund a project rather than external debt even if it wasn’t optimal, in order to achieve a stock price gain.

#45

I still don’t get it. If a postive NPV project comes along why not raise capital in a way that keeps your WACC as low as possible? -----> thus providing as much value as possible for shareholders (and in theory raising the stock price).

#46

I have had schweser questions in which I picked C and got burned the answer was A.

#47

It’s wrong. Straight out of the CFA readings: The goal of a company’s capital structure decision is to … that maximises the VALUE of a company by MINIMISING THE AVERAGE COST OF CAPITAL. Now, there’s a 0.1% chance that they think A is wrong because it doesn’t differentiate between average cost of capital and ‘cost of capital’ but then I don’t know what ‘cost of capital’ means in isolation. The distinction between share price and firm value is far greater. Even over the longest time frame you can’t be sure that share price will properly reflect firm value.

#48

Those who pick C will not be correct on exam day…the CFAI text is fairly clear on this (look for yourself) and Allen Resources is a joke.