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AICPA CPA-Business Exam - Topic 1 Question 62 Discussion

Actual exam question for AICPA's CPA-Business exam
Question #: 62
Topic #: 1
[All CPA-Business Questions]

Additional Data

* The long-term debt was originally issued at par ($1,000/bond) and is currently trading at $1,250 per bond.

* Martin Corporation can now issue debt at 150 basis points over U.S. treasury bonds.

* The current risk-free rate (U.S. treasury bonds) is 7 percent.

* Martin's common stock is currently selling at $32 per share.

* The expected market return is currently 15 percent.

* The beta value for Martin is 1.25.

* Martin's effective corporate income tax rate is 40 percent.

Using the Capital Asset Pricing Model (CAPM), Corporation's current cost of common equity is:

Show Suggested Answer Hide Answer
Suggested Answer: C

Choice 'c' is correct. 17.00 percent. Using the CAPM model, Martin's current cost of common equity would be:

Cost of equity = Capital risk free rate + Beta (market rate risk free rate)

Cost of equity = 7% + 1.25 (15% 7%)

Cost of equity = 7% + 1.25 (8%)

Cost of equity = 7% + 10%

Cost of equity = 17%


by Dominque at Dec 09, 2022, 04:16 PM

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Bambi
4 months ago
18.75% seems way too high, right?
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Ollie
4 months ago
Definitely going with option B, feels right.
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Virgilio
4 months ago
Wait, how is the beta affecting this?
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Melina
4 months ago
I think it’s higher, maybe 17%?
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Isidra
4 months ago
The cost of equity using CAPM is around 15%.
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Maryann
5 months ago
I practiced a similar question last week, and I think the answer was around 17% based on the calculations we did.
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Virgina
5 months ago
I feel like the beta of 1.25 is going to push the cost of equity higher, but I can't recall if it will be over 15% or not.
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Viola
5 months ago
I think we need to use the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). That sounds familiar.
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Malcolm
5 months ago
I remember we calculated the cost of equity using CAPM in class, but I'm not entirely sure how to apply the numbers here.
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Winfred
5 months ago
Hmm, I remember learning about the different BGP attribute types, but I'm a bit fuzzy on the specifics. I'll have to review my notes to refresh my memory.
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Vivan
5 months ago
Ah, I've used the NETSTAT command before to check network statistics. I'm pretty confident that NETSTAT -s is the way to go here.
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Bev
5 months ago
I'm a bit confused by the terminology in this question. I'll need to take a closer look at the options and try to match them up with my understanding of SFP+ line cards.
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Karima
5 months ago
The export destination is definitely 172.17.12.1, but I'm confused if all options had the same TTL settings... I might need to double-check that.
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Bernardine
5 months ago
Okay, let me see here. I think the key is to focus on the renewal process - identifying the customer's current usage, any new requirements, and then putting together an accurate quote. Options B and C seem to cover those main steps.
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Dorthy
5 months ago
I think the shutter speed setting might help with motion blur, but I'm not completely sure if that's the only factor.
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