AICPA Exam CPA-Business Topic 3 Question 65 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 65
Topic #: 3

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?

A8.4%

B9.8%

C12.0%

D14.0%

Show Suggested 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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Daren

1 days 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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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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Gilberto

12 days 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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