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Exam CIMAPRA19-F03-1 Topic 2 Question 64 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 64
Topic #: 2
Under traditional theory, an increase in a company's WACC would cause the value of the company to:

Suggested Answer: B Vote an answer

Under traditional (pre-Modigliani & Miller) capital structure theory, there is an assumed inverse relationship between WACC and company value. The idea is:
As a firm moves towards its optimal capital structure, the WACC falls, and the total value of the firm (equity
+ debt) rises.
Beyond that optimal point, extra gearing increases financial risk, so the required return from both debt and equity goes up, causing WACC to rise and firm value to fall.
So, within this framework, if a company's WACC increases, that means it has moved away from its optimal capital structure, and the value of the company will decrease.
Therefore, under traditional theory, an increase in WACC # decrease in company value, so the correct answer is B.

by Dana at Oct 12, 2026, 12:04 PM

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