[barelystayingsane]

I’ve been having a lot of issues with the unwritten assumptions in the Becker practice problems. With all of the word questions in BEC, having to figure out the assumptions and rerun the computation after learning that the answer I got wasn’t one of the options requires even more time I don’t have. For example:

Zig Corp. provides the following information:

Pretax operation profit $300,000,000

Tax rate 40%

Capital used to generate profits (50% debt, 50% equity) 1,200,000,000

Cost of equity 15%

Cost of debt 5%

Which of the following represents Zig’s year-end economic value-added amount?

a. $180,000,000

b. $120,000,000

c. $0

d. $60,000,000

My initial answer was $72,000,000 because it doesn’t say that the cost of debt is after-tax, but apparently I was supposed to assume that? This problem was pretty easy/quick to rerun, but on some of the problems it really takes a chunk out of your time. For those of you who have taken BEC, are the actual exam questions worded better and/or do you have any tricks for figuring out the assumptions in the problem?

[Anonymous]

The cost of debt is always considered after tax. I don't understand why you would assume otherwise? This problem is probably easier than the ones i saw on my exam as a whole.

[barelystayingsane]

In all of the other Becker questions, it has specifically said “after-tax cost of debt” or “debt with an after-tax cost of financing” and 10 questions before the one above (along with about five other questions) I was asked to solve the WACC given a 10% cost of debt, a 12% return on common stock, a 10% return on preferred stock and a 30% marginal tax rate. I was required to multiply the cost of debt by 70% to calculate the after-tax cost of debt. Given all of that, I think the better question would be why wouldn't I assume otherwise? Haha I don't think it was an unreasonable assumption to make.

Very glad to hear you say that this problem was easier than the ones on your exam, though! Other than the confusion on the assumption, I thought it was a pretty easy question.

[Amay]

I had the same problem with this question. I know sometimes they give extra information but if they give the tax rate on a cost of debt question I would also assume USE IT.

BEC: 73, 81
AUD: 85
FAR: 71, 77
REG: 74, 75...finally DONE! 😀

*This is my 2nd attempt at the CPA exam. For all of you who have failed this exam many times, given up on it, or taken a break like me, remember that it is still possible to finish what you started...failure is the opportunity to begin again more intelligently 🙂

[barelystayingsane]

Whew! Glad I'm not the only one!

[barelystayingsane]

For anyone else who happens to run across this question and shares my confusion, I reached out to Becker, and the rep agreed with me:

“This is an old CPA exam question from the old days and it has driven candidates nuts for years. My honest opinion is that on the exam, you will be given enough information to know whether you should multiply by 1 – the tax rate or not. For example, they would tell you the pretax cost of debt is X, or the after tax cost of debt is X. Personally, in this question I would have multiplied by 1 – the tax rate. So I would agree with you. But let's hope that they are clear on the test!”

Let's hope he's right!

[Amay]

COOL!!!!!

BEC: 73, 81
AUD: 85
FAR: 71, 77
REG: 74, 75...finally DONE! 😀

*This is my 2nd attempt at the CPA exam. For all of you who have failed this exam many times, given up on it, or taken a break like me, remember that it is still possible to finish what you started...failure is the opportunity to begin again more intelligently 🙂

[ZSRizvi]

Barelystayingsane, I came across this question and I had the exact answer as you. I spent over 15 minutes on this question (maybe even longer) and I felt so frustrated when I looked at the answer and it turned out to be as simple as the cost of debt being the after-tax cost of debt.

I've been coming across multiple questions, both in the Becker problems and Wiley Test Bank, that are just worded confusingly or have these “assumptions.”

It's driving me insane.

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[Author]

Replies