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Your help is greatly appreciated! It will be my third time sitting for BEC. I used Wiley and failed twice (71 and 72). I just purchased Ninja due to numerous reviews I have read. I really hope this is my last attempt. That being said, tricky calculation problems are my biggest threat. I really need clarification on the questions below.

Thank you so much!

What is the differences in question between these two? Why did they use retained earnings when the question clearly says not to. Why did they consider the floatation cost and discount in one question but not the other? It seems to me the only differences is the project capital (1,000,000 and 200,000). What am I missing?

First Question:
Lemur Company’s $10 par value common stock currently sells at $100 per share. Lemur has retained earnings of $100,000; once this is exhausted, Lemur will raise any more necessary equity capital through a stock issue. Lemur can raise cash by selling common stock at a $2 per share discount with a $3 per share floatation cost. Annual cash dividends are $7 per share and are not expected to change. The estimated after-tax cost of funds raised by long-term bonds is 5%. The estimated cost of funds raised by preferred stock is 6%. Lemur’s preferred capital structure is 30% long-term debt, 20% preferred stock, and 50% common stock. Not counting the $100,000 of retained earnings, the current capital structure is Lemur’s preferred structure. If Lemur raises funds for projects requiring capital of $200,000 and keeps its preferred capital structure, what would be the approximate weighted-average cost of capital?

A.6.63%
B.6.39%
C.6.35%
D.6.20%
You are right The correct answer is: D

Second Question:
Lemur Company’s $10 par value common stock currently sells at $100 per share. Lemur has retained earnings of
$100,000; once this is exhausted, Lemur will raise any more necessary equity capital through a stock issue. Lemur
can raise cash by selling common stock at a $2 per share discount with a $3 per share floatation cost. Annual cash
dividends are $7 per share and are not expected to change. The estimated after-tax cost of funds raised by long-term
bonds is 5%. The estimated cost of funds raised by preferred stock is 6%. Lemur’s preferred capital structure is 30%
long-term debt, 20% preferred stock, and 50% common stock. Not counting the $100,000 of retained earnings, the
current capital structure is Lemur’s preferred structure. If Lemur raises funds for projects requiring capital of
$1,000,000 and keeps its preferred capital structure, what would be the weighted-average cost of capital?

A.6.63%
B.6.39%
C.6.35%
D.6.20%
You answered: D The correct answer is: C