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AICPA CPA-Business Exam - Topic 2 Question 61 Discussion

DQZ Telecom is considering a project for the coming year, which will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.* Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8 percent, and flotation costs of 2 percent of par.* Use $35 million of funds generated from earnings.The equity market is expected to earn 12 percent. U.S. treasury bonds are currently yielding 5 percent.The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40 percent.The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is:
B) 8.08 percent.
A) 11.80 percent.
C) 10.00 percent.
D) 7.92 percent.

AICPA CPA-Business Exam - Topic 2 Question 61 Discussion

Actual exam question for AICPA's CPA-Business exam
Question #: 61
Topic #: 2
[All CPA-Business Questions]

DQZ Telecom is considering a project for the coming year, which will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.

* Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8 percent, and flotation costs of 2 percent of par.

* Use $35 million of funds generated from earnings.

The equity market is expected to earn 12 percent. U.S. treasury bonds are currently yielding 5 percent.

The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40 percent.

The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is:

Show Suggested Answer Hide Answer
Suggested Answer: B

Choice 'b' is correct. 8.08 percent before-tax cost of debt financing, net of flotation costs.


by Willodean at Nov 17, 2022, 01:43 PM

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Lili
8 months ago
So, are we really sure about the beta coefficient being .60? Sounds off!
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Antione
8 months ago
I disagree with that; the effective tax rate should lower the cost of debt.
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Kasandra
9 months ago
Wait, how do they get 11.80%? That seems way too high!
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Shonda
9 months ago
I think the answer is B, 8.08%. Seems right to me.
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Rickie
9 months ago
The coupon rate is 8%, but don't forget the flotation costs!
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Letha
9 months ago
I feel like the answer might be closer to 8.08% since the flotation costs could really affect the overall cost of the debt.
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Rutha
9 months ago
I practiced a similar question where we had to find the after-tax cost of debt. I wonder if that will help here, or if we need to focus only on the before-tax cost.
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Scot
9 months ago
I think the coupon rate is 8%, but we also need to adjust for the price at which the bonds are issued. That might change the effective cost.
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Micah
9 months ago
I remember we calculated the cost of debt in class, but I'm not sure how to factor in the flotation costs correctly.
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Tora
9 months ago
Hmm, I'm a bit unsure about this one. I know Azure Traffic Manager can be used for load balancing and routing, but I'm not sure if that's the best tool for identifying the optimal Azure region. I'll have to think this through a bit more.
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Tequila
9 months ago
Hmm, I'm a bit unsure about this one. I know requirements development is important, but I'm not totally clear on all the specific steps involved. I'll have to think this through carefully.
upvoted 0 times
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Vincent
10 months ago
I feel like the questions we practiced touched on how RADIUS works but I can't quite recall if requests are generated without defining a source interface like option C mentions.
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