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AICPA CPA-Business Exam - Topic 3 Question 65 Discussion

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?
C) 12.0%
A) 8.4%
B) 9.8%
D) 14.0%

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?

Show Suggested Answer Hide Answer
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
8 months ago
Isn't the effective interest rate higher than the coupon rate? That’s surprising!
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Talia
8 months ago
Totally agree, 8.4% makes sense with the tax adjustment!
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Emmanuel
9 months ago
Wait, how do we get to 8.4%? Seems off to me.
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Luke
9 months ago
I think it's definitely 8.4%!
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Lindsey
9 months ago
The net cost of debt is calculated after tax, so don't forget that!
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Alonzo
9 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
9 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
9 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
9 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
9 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
9 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
9 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
10 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
1 year 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
1 year ago
I agree, A) 8.4% seems like the correct answer considering the corporate tax rate.
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Stephen
1 year 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
1 year ago
I think you're right, A) 8.4% makes sense with the tax deduction factored in.
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Daren
1 year 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
1 year 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
1 year ago
I believe it's 12.0% because we need to factor in the tax rate as well.
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Yen
1 year ago
C) 12.0%
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Ettie
1 year ago
Hmm, I think the net cost of debt is actually 8.4% after considering the tax rate.
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Keneth
1 year ago
A) 8.4%
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Gilberto
1 year 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
1 year ago
I'm not sure, but I think I understand now. Thanks for the explanation, Asha.
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Asha
1 year 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
1 year ago
I think the answer is A) 8.4%
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