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AICPA CPA-Business Exam - Topic 3 Question 65 Discussion

Actual exam question for AICPA's CPA-Business exam
Question #: 65
Topic #: 3
[All CPA-Business Questions]

The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm's net cost of debt?

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Suggested Answer: C

Choice 'c' is correct. Return on investment equals net income divided by average invested capital:

Choices 'a', 'b', and 'd' are incorrect, per the above calculation.


by Mitsue at Feb 07, 2023, 06:04 AM

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Ryan
4 months ago
Isn't the effective interest rate higher than the coupon rate? That’s surprising!
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Talia
4 months ago
Totally agree, 8.4% makes sense with the tax adjustment!
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Emmanuel
4 months ago
Wait, how do we get to 8.4%? Seems off to me.
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Luke
4 months ago
I think it's definitely 8.4%!
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Lindsey
4 months ago
The net cost of debt is calculated after tax, so don't forget that!
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Alonzo
5 months ago
I’m leaning towards option A, 8.4%, but I’m not confident. I hope I remember the tax adjustment correctly!
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Felicidad
5 months ago
I feel like the answer should be lower than the effective interest rate because of the tax deduction, but I can't recall the exact formula we used in class.
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Kenda
5 months ago
I remember a similar question where we had to adjust the coupon rate for taxes. I think it was something like the effective rate minus the tax shield?
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Samuel
5 months ago
I think the net cost of debt is calculated by taking the effective interest rate and adjusting for taxes, but I'm not entirely sure how to apply the tax rate here.
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Juan
5 months ago
Hmm, I'm a bit confused by the wording here. I'll need to re-read the question and the options a few times to make sure I understand what they're asking.
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Leatha
5 months ago
This looks like a tricky SQL query question. I'll need to carefully read through the options and think about the logic behind each one.
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Adaline
5 months ago
Okay, I've got a strategy for this. I'll eliminate the options that don't seem directly relevant, like D. Then I'll compare A and B more closely to decide which one best fits the requirement to quickly identify location and status changes.
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Leonora
5 months ago
Distribution channel, supply chain, transaction channel - they all seem related to moving products, but I'm not sure which one is the most accurate answer here. I'll have to carefully consider the differences between these options.
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Shenika
10 months ago
A) 8.4% looks like the right answer to me. The net cost of debt should be lower than the effective interest rate due to the tax deduction. Now, if only I could figure out how to deduct my gym membership as a business expense...
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Delmy
9 months ago
I agree, A) 8.4% seems like the correct answer considering the corporate tax rate.
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Stephen
9 months ago
Yeah, the net cost of debt is definitely lower than the effective interest rate because of the tax benefit.
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Hildred
9 months ago
I think you're right, A) 8.4% makes sense with the tax deduction factored in.
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Daren
10 months ago
I hate these tricky finance questions. Can we just skip ahead to the multiple-choice section on corporate mergers and acquisitions? That's where I really shine.
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An
10 months ago
Hmm, I'm not sure about this one. The coupon rate is 12% and the effective interest rate is 14%, so I'm tempted to go with D) 14.0%. But then again, the tax rate needs to be factored in. I'll have to double-check my calculations.
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Truman
9 months ago
I believe it's 12.0% because we need to factor in the tax rate as well.
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Yen
10 months ago
C) 12.0%
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Ettie
10 months ago
Hmm, I think the net cost of debt is actually 8.4% after considering the tax rate.
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Keneth
10 months ago
A) 8.4%
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Gilberto
10 months ago
The question is asking for the net cost of debt, so the correct answer must take into account the corporate tax rate. I'll go with B) 9.8% - it seems to be the only option that considers the tax deductibility of interest payments.
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Viki
10 months ago
I'm not sure, but I think I understand now. Thanks for the explanation, Asha.
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Asha
10 months ago
I agree with Luisa, because the net cost of debt is calculated as (1 - tax rate) * coupon rate, which is (1 - 0.30) * 12% = 8.4%
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Luisa
11 months ago
I think the answer is A) 8.4%
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