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CFA Level 1 Question of the Week - Corporate Finance

When financing a new project by raising capital, in which of the following situations will a company most likely increase the value of its firm?
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CFA Level 1 Question of the Week - Corporate Finance 5 votes

A. The value of the firm will increase when the return from the project is positive.
60% 3 votes
B. The value of the firm will increase only when the weighted average cost of capital (WACC) is greater than the return on the project.
0% 0 votes
C. The value of the firm will increase only when the return on the project is greater than the weighted average cost of capital (WACC).
40% 2 votes

Comments

  • The correct answer is C.

    The WACC is considered as an opportunity cost for the firm. Therefore, a company can create value by producing returns that are greater than the cost of capital (WACC).

    Options B and C are incorrect because taking on projects whose returns are below the WACC will decrease the value of the firm. For example, a one-year project that would return 1% when the cost of capital is 10% would decrease the value of the firm.
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