[jeff]

Welcome to the Q2 2017 CPA Exam Study Group for BEC. 🙂

[Tncincy]

It's been a slow day at work today (will probably pick up this evening), but logged into MCQ's, working weakest to strong, until 70%. Seems like forever, but I am getting there and understanding more. I am determined to make it work. No more quitting, I will pass…..(self talk) 🙂

It begins with a 75
Been here too long as a cheerleader....ready to pass

[JJ2992]

@tnciny that sounds like a good plan…it's tough working full time and studying. I try to study at work as much as I can as well.

How many of you guys are working full time and studying?

[nkwhitaker]

Can someone please explain to me why the underpricing and flotation costs are not subtracted for the common stock calculation?

Williams, Inc., is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%.
Williams can sell 8% preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share.
Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and flotation costs are expected to amount to $5 per share.
Williams expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
Williams' preferred capital structure is long-term debt, 30%; preferred stock, 20%; and common stock, 50%.
The firm's weighted average cost of capital would be:

Answer:
The weighted cost of capital is 6.6%.

Step 1: Calculate the after-tax cost of each source of capital.

The cost of long-term debt, after tax, is given at 4.8%.
The cost of new preferred stock can be calculated as:
kpm = D / (PO – u – f), or kpm = 8.40 / (105 – 0 – 5) = 8.4%
Where:
D = Annual dividend, or 0.08 × $105 (the par value), or $8.4
PO = Selling price to the public of the new issue
u = Underpricing
f = Flotation cost per share
New equity consists of retained earnings and/or new issues of common stock. In this case, 50% of the 200,000 of total new funds must come from equity. Since the firm has $100,000 in retained earnings, the relevant cost of new equity is the cost of retained earnings, 7 ÷ 100 + 0%, or 7.0%.
Step 2: Calculate the Weighted Average Cost of Capital:

Source After-Tax Cost x Weight =
—— ————– ——
a. L-T Debt .048 x .30 = .0144
b. Pref. Stock .084 x .20 = .0168
c. Ret. Earnings .070 x .50 = .0350
—–
Weighted Average Cost of Capital = .066 or 6.6%

[Anonymous]

NYSB22 I am working full time and have a toddler. It's been fun in my household… Not! I study during my lunch hour and when my toddler goes to bed. Living off of 4 hours a sleep each day! I hope it pays off!

[Paul]

Does anyone have any advice for studying problems like question 894 from BEC MCQ? The topic is budget and Analysis. Any good videos on youtube or other resources to facilitate learning. I don't understand why February is considered to be 2 months after April..?.. Thanks you!

BEC 10/29/16
FAR 11/26/16
REG TBA
AUD TBA

[Anonymous]

Hey guys so I just took the BEC exam today.

Dont worry too much about the sims as I felt they were a lot easier then the ones for AUD and REG. I used becker and felt like their sims prepared me well enough. MC was all in all the same.

[Anonymous]

CPA2017, can I ask how you did on the Becker Mock Exam 1 and 2? It sounds like you came out of the testing center confident.

[Jacob Carter]

CPA BEC Question of the Day

With answers and detailed Explanation.

[Joe]

@Norize Whitaker the valuation of the common stocks for the purpose of calculating WACC can be evaluated using the:
CAPM, DCF, and BYRP all of which do not have reduce the common stock by the underpricing and flotation. If you are using Becker take a look at page B2-10 for formulas on how to calculate CAPM, DCF, and BYRP. Chances are that the question will have the components to calculate one of them usually CAPM or DCF based on what I ahve seen in the past.

I hope this helps.

[nkwhitaker]

Thanks @joeserrone!

I'm trying to figure out why for the question below the answer is 7.6%. Why is it different than the question I posted earlier? Is it because I'm not asked to calculate WACC? What am I missing?

Williams, Inc., is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments.
• Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%.
• Williams can sell 8% preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share.
• Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and flotation costs are expected to amount to $5 per share.
• Williams expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
• Williams' preferred capital structure is long-term debt, 30%; preferred stock, 20%; and common stock, 50%.
The cost of funds from the sale of common stock for Williams, Inc., is:
Answer: B
The cost of funds from the sale of common stock is 7.6%. According to the Gordon Dividend Capitalization Model, the market value of a share of stock is equal to the present value of future dividend streams. This formula states:
kcm = (D / (P – u – f)) + g
= (7 / (100 – 3 – 5)) + 0
= 7 / 92
= 7.6%

[Joe]

@Norize Whitaker If you are looking at Becker take a look at page B2-11 under the Discounted Cash Flow (DCF) the formula is (D1/P)+g in your case the dividend is $ 7 and the Price is $ 100 the growth is not given to you in the Common Stock line therefore 7/100 = 0.07 or 7 Percent

[JJ2992]

@chasinCPA wow! I admire you, I could never physically do that! How many hours of studying per day are you getting in?
@CPA2017 thanks for the info!

[nkwhitaker]

@joeserrone So you do not use the Gordon Dividend Capitalization Model (kcm = (D / (P – u – f)) + g) for calculating WACC?

[Joe]

Not for the purpose of WACC

[Tncincy]

Ughhh, I am feeling anxious again. I started writing ninja notes to try and relax. This test is really messing with my head 🙁 , one minute I'm ok then the next I start to worry about failing. I'm not quitting though. I'm on the count down til test time.

It begins with a 75
Been here too long as a cheerleader....ready to pass

[Author]

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