[rlg5150]

Seriously, if the exam is anything like what my review is throwing at me, there’s no way I’ll ever be a CPA. I feel like I could go back to school and double major in economics and financial management and still not understand these two chapters. Each chapter (economics and financial management) feels like as much material as my FAR exam. I don’t understand how it’s possible to memorize things when they go so in depth with the material?

For example, some of this stuff like market risk and beta risk and security market line…. Risk is up, down, sideways, backwards and forwards and prices being affected by a 10 step formula with symbols I’ve never even seen in my entire life… Starting to feel like my FAR score will be wasted by not having the time to go back to school 7 times and get a freaking degree in each of the 7 chapters of my book.

FAR - 85
AUD - 86
BEC - 84
REG - 88

[ksutphen]

@rig5150…I have no idea if I have the right answer but this is how I would tackle it. The problem states that after Lemur raises the needed funds, the preferred capital structure will remain in place. So your percentages for the weighted cost of capital formula will stay the same. Debt (30%), Preferred Stock (20%) and Common Stock (50%). You're given the cost of the Preferred Stock (6%) and the after tax cost of debt (5%). The only one you have to calculate is Common Stock.. Using the formula (Next Expected Divident($7)/(Current Stock Price($100-$2)-Flotation Cost($3))+Expected Growth(0), you'll have 7/(98-3)+0 =.0737.

WACC= (30%x5%)+(20%x6%)+(50%x7.4%)=6.4%

Even if I'm not right, it sounds good, doesn't it? Good luck! I take BEC on Feb 9.

FAR 8/27/12 86
BEC 2/9/13 86
AUD 5/28/13 89
REG July/August 2013

[rlg5150]

“$500,000 (50% x $1,000,000) of the new capital will be common equity; the first $100,000 of the common equity portion will be from retained earnings and $400,000 will be from a new stock issue. The remainder will be $300,000 (30% x $1,000,000) of long-term debt and $200,000 (20% x $1,000,000) of preferred stock.

Long-term debt [(3 / 10) x 5.00%]

---

1.50%

Preferred stock [(2 / 10) x 6.00%]

---

1.20

Retained earnings [(1 / 10) x 7.00%]

---

0.70

Common stock [(4 / 10) x 7.37%]

---

2.95

Weighted average cost of capital

---

6.35%

FAR - 85
AUD - 86
BEC - 84
REG - 88

[FlipACoin]

Ahhhh tricky one! They slip in the fact that they will use the retained earnings. I'm not sure I understand why they use the cost of equity (7%..$7 Div/$100 share price) for the retained earnings rather than WACC, as traditionally the use of WACC is suggested as opportunity cost for any cash investment. They do though, and outside of the tricky use of retained earnings ksutphen was absolutely correct in the WACC calc.

rlg..Just out of curiosity what part of this problem really drives you nuts? Where were you getting lost?

[no.cruncher]

Maybe I should've posted the following on this thread… This section is brutal guys/gals… but we gotta keep @ it!!!!

COPIED POST:

I was just working on the Cost of Capital Components and WACC this whole week, and I was searching for where that Tax Rate was accounted for: In any case, here's my regurgitation straight from my head, for my or your reference, and or correction 🙂

(Cost of Capital Components) = (CCC)

---

CdT : “After-tax Cost of Debt” = i rate ( 1 – .T )

Cps: “Net of Float, Cost of P/S” = [ P/S Divs / P/S Po ( 1 – .F ) ]

Cce: via R/E OR Issued C/S

Cr/e : “Cost of R/E Equity” = ( D1 / Po ) + *G

OR

Cc/s: “Net of Float, Cost of Newly Issued C/S Equity” = ( D1 / Po ) + *G

==========================================================

Weight A Average CC = WACC = WA*CdT + WA*Cps + WA*Cce

==========================================================

NOTE:

WACC ~ Target: Optimal Capital Structure : Increase S/H Wealth : Increase Stock P. : Increase Firm Value

Costs of Capital ~ Required Rates of Returns (RROR) by Investors and or Shareholders

Cc/s > Cr/e because External Funding via C/S has Stock Issuance Costs ~ Float %

Capital Source Funding Increases : (WACC) Increases : Marginal Cost of Capital (MCC) Increases

Long Run : MCC > WACC

D1 = Next Year's Dividends @ t = 1

Po = Initial Current Stock Price @ t = 0

.DPO = Dividends Payout Ratio = C/S Dividends / NI

*G = Retention Rate * ROE = ( 1 – .DPO ) ( NI / Equity ) = ( 1 – C/S Divs / NI ) ( NI / Equity ) = ( R/E / NI ) ( NI / Equity)

= ( R/E / NI)

G Dependent on RROR ~ Cc/s, Otherwise G not met!

FAR - 7/16/2012 *76 : 2.5mo [Exp. 1/2014]
AUD - 8/31/2012 *82 : 1mo
REG - 11/27/2012 *83 : 2.5mo
BEC - 2/27/2013 *80 : 2.5mo LET'S DO THIS!!!
Ethics - 3/13

[ 2011 Kaplan Self Study - Textbook, MP3s, FlashCards ]

CMA... Hmmm...???

[rlg5150]

I guess what gets to me the most is that WACC is covered in less than a page and seems very straight forward.. Then I get a problem like that above and it's impossible to solve with the book alone. You have to get the problems wrong in order to learn how to do them. This isn't necessarily a bad thing by itself, but it's hard to stay motivated when you have to get so questions wrong in a row.

FAR - 85
AUD - 86
BEC - 84
REG - 88

[rlg5150]

I had a moment of weakness. CPA = Can Pass Attitude!!

I've moved on from economics and Financial Management (aka the devil's chapters) and I'm starting Decision Making. I think I had a grade somewhere around a 99% in Cost Accounting in college so this chapter ought to be a little more encouraging. I think the rest of the book will be more like a review than a learning experience (I had never heard the term or concept of cost of capital or WACC, or beta coefficient and all that stuff, until I started studying BEC).

FAR - 85
AUD - 86
BEC - 84
REG - 88

[GACPA2K13]

Hang in there. Passed BEC with an 82. Keep plugging away. It's a lot of information, but the more you study, the luckier you get

[RedBullRacing]

I feel like what makes BEC tough (to me) at least was all of the management accounting. I enjoy talking and reading about econ so I had an advantage there; however, if you have done FAR and now are doing BEC, the accounting switch is probably really tough to grasp.

Just stick with it, and good luck. There is only 6 sections!

BEC - 85
FAR - 72, 80
REG - 79
AUD - 81

Used only Becker. Let the book burning begin!

[Author]

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