Discuss AICPA CPA-Business Exam Topic 2 Question 61

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:

A11.80 percent.

B8.08 percent.

C10.00 percent.

D7.92 percent.

Suggested Answer: B

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

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12 comments · newest first

Lili 11 months ago

So, are we really sure about the beta coefficient being .60? Sounds off!

Antione 11 months ago

I disagree with that; the effective tax rate should lower the cost of debt.

Kasandra 12 months ago

Wait, how do they get 11.80%? That seems way too high!

Shonda 12 months ago

I think the answer is B, 8.08%. Seems right to me.

Rickie 12 months ago

The coupon rate is 8%, but don't forget the flotation costs!

Letha 1 year 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.

Rutha 1 year 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.

Scot 1 year 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.

Micah 1 year ago

I remember we calculated the cost of debt in class, but I'm not sure how to factor in the flotation costs correctly.

Tora 1 year 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.

Tequila 1 year 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.

Vincent 1 year 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.

AICPA CPA-Business Exam - Topic 2 Question 61 Discussion