B3 Questions. Two weeks until exam - Page 2

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  • #185413
    MattCPA18
    Member

    Im taking BEC on May 22 so I need help understanding some topics, mainly in B3.

    Can someone please explain to me the formulas for the Degree of Operating and Financial Leverage. The book is saying the formula is one thing and the questions are using a completely different method. For example explaining the terms EBIT & EPS. It just isn’t clicking for me.

    Also I think Im starting to grasp the cost of debt concepts but just to confirm,

    – is the cost of debt (pre-tax), risk-free rate of return, & the required rate of return all the same thing?

    – is the cost of equity and the cost of retained earnings both found by using the formula kre = krf + b(km – krf) ?

    – how is the “weighted average cost of debt” different from just “cost of debt”?

    I appreciate the help. Thanks!

    AUD – Passed

    Reg – Passed

Viewing 3 replies - 16 through 18 (of 18 total)
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  • #550899
    Anonymous
    Inactive

    Oh, I see. Yeah for 35-37 it was weird. But I don't think you have to worry about this too much since they give you the complex formulas and you can just plug in the #s.

    But generally, I think understanding what M.O.D explained and knowing the formulas from the textbook should be good enough.

    For 46, It says “Martin Corp issues debt @ 150 basis points over US Treasury bonds”, so that is why they added to the risk free rate.

    I think a logical way of thinking about it is that cost of debt usually would be higher than the risk free rate.

    Debt like bonds have more risk than US treasury bills, so bondholders will want a higher return for buying the bonds (higher cost for the company). Otherwise they would just invest in risk free securities like T-bills.

    In this question, they basically say they want 150 basis points (1.5%) more return over the risk free rate (7.5%) = 8.5% total. (Then you calculate after tax as well for the cost of debt).

    #550894
    MattCPA18
    Member

    okay thanks that helped a lot!!!

    #550901
    MattCPA18
    Member

    okay thanks that helped a lot!!!

Viewing 3 replies - 16 through 18 (of 18 total)
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