 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at actual CPA questions that were released from the AI CPA. The reason I say actual is because the AI CPA is the organization that administered the exam. Therefore, those questions were actual questions appeared on the exam. They may appear in one way or another, but the point is if you know how to approach these questions, you'll be ready to approach the actual questions on the exam day. And the format will be the same format as the actual exam. Specifically, we're gonna be covering BEC questions. As always, I would like to remind you to connect with me only then if you haven't done so. YouTube is where I house all my lectures, 1,600 plus accounting, audit and tax and finance lectures. This is a list of all the courses that I cover, including thousands of CPA questions. If you like my lectures, please like them, share them, put them in playlists. If they benefit you, it means they might benefit other people. On my website, you'll have access to additional resources such as PowerPoint slides, notes, true, false, multiple choice. And if you're studying for your CPA exam, 2,000 plus CPA questions, I strongly suggest you check out my website if you are seriously studying for your CPA exam. Let's take a look at the first question. An analyst expect a company to pay a dividend of $5 with a dividend growth rate of 3%. The inflation rate is expected to fall from 5% per year to 3% per year, okay? As a result of the change in this inflation premium, which is premium going down, the companies will, what happened, what to the company? So notice here, they're even talking about the stock. So two answers has the stock price. Two answer has the cost of equity. Now let me tell you something. You cannot really predict anything about the stock price. So as a result of changes in inflation, you don't know what's gonna happen to the stock price. The stock price could increase. The stock price could remain stable. I would say I would immediately eliminate the two answers about the stock price. Again, because you cannot really make any projection about the stock price, whether it's gonna go down and remain stable because inflation could affect each company differently. For some companies, inflation go down, could benefit the company. Sometimes inflation goes up, could benefit the company. So we cannot say anything about inflation. Now we're down to 50-50. So it must be something to do with cost of equity. Cost of equity. Would the cost of equity likely to remain stable or would the cost of equity likely to decrease? That's the question here. Now, I want you to think about it. When we looked at the interest rate, remember, the interest as inflation goes up, we have to pay more. The cost of money goes up because inflation, the cost of everything goes up and the money is a commodity. So the cost of the money goes up as inflation goes up. What is happening here? What is happening here? Well, what's happening here? Inflation is going down. As the cost of the money goes down, as interest rate goes down, therefore the cost of equity, the cost of the stock will also go down because the premium, let me see if I can kind of show you this on a graph or in some type of format. So you will see this. So let's assume we have inflation of 5%. This is the inflation. Well, guess what? Now, the interest rate, the interest rate, when the cost of debt has to be more, you have to pay, let's say 8%. Why? Why? Because when you borrow money, you have to pay the lenders. This is the debt cost of debt. Debt, the cost of debt is 8%. What does that mean? It's mean you are paying 3% premium over inflation to borrow money. Now, we know for the fact that the cost of equity, now for equity you have to pay an additional premium. So if you want to buy equity, you want to raise money from equity, you might have to pay, let's say 15%. This is the cost of equity and this is 7% above the cost of debt. Now, here's what's gonna happen. If this line, if the inflation goes down as they're saying here goes from 5% to 3%, what's gonna happen? The cost of debt should go down by approximately 2%, which the cost of debt, it means the cost of borrowing money goes down to 6%. Therefore, the cost of equity should also go down by approximately 2%. Now, I'm not saying it should happen percent for a percent dollar for a dollar or the point is if inflation goes down, the cost of debt should goes down. As a result, the cost of equity goes down because the cost of money should go down in general. So the cost of equity would likely decrease. Notice how the answer is written will likely, not for sure, will likely based on the information, but we cannot say anything about the stock price and cost of equity will likely remain stable, not necessary. If the cost of money goes down, the cost of equity is part of the cost of the money. So for the cost of equity will go down. Let's take a look at this question. In which of the following situation would there be an inelastic demand? Okay, now before you read the answers, you need to know what is an inelastic demand. Inelastic demand means if there's any change in the price, specifically an increase in the price, the demand does not change proportionally to that increase. For example, if, think about it, if the price goes up by 10% and demand falls by 10%, well, guess what? It's not inelastic, it's not inelastic. Why? Because as the price goes up, the quantity demand went down by the same price. This is what we expect to see. Inelastic is when the price goes up by 10% and demand only dropped by six or seven or 5%. So the price went up by 10, but the demand did not drop by the same amount. So think of this, I'm gonna give you an example, just gonna make it close to you. For example, the iPhone, if Apple increases their iPhone by 10%, maybe the demand will go down, but not necessarily by 10%. Maybe it will go down by five. Why? Because there is an inelastic demand. The price of the phone kind of, it's not really influenced by the price that much, okay? So let's take a look at the answers. A, a 5% increase, a 5% price increase result in a 3% decrease in the quantity demanded. This looks like an inelastic demand. Why? Because the price went up by five, demand went down only by three, okay? But don't select this answer. Make sure you go all over the answers. A 5% increase result in a 6% decrease. Hold on a second, this is elastic. Why? Because as the price went up, the demand went down. So this product is price sensitive. It's the opposite of an inelastic. A 5% increase resulted in a 4% decrease. Again, it's elastic. As the price went up, the quantity demanded went down by the same amount. A 3% decrease result in a 5% increase. That's good. This is how we expect things to happen. If the price goes down, we expect most likely this is the law of supply and demand, the quantity demanded to go up. So the answer, as we said, A, the price went up. The demand did not go down as much. So this is inelastic demand. This is an inelastic demand situation. Let's take a look at this question. A company is considering a move to a software as a service. S-A-A-S offering instead of a traditional in-house application, which of the following concerns is unique to software as a service? Now, for one thing, if you don't know what a software as a service is, then you'll be able to, you won't be able to answer the question. But think of that in contrast to traditional in-house application. Traditional in-house application, it means the software is housed and the application is housed at your place of business. Software as a service, think of the cloud. Actually, a software as a service is a form of a cloud. It's when a third party hosts your application. Think of Google document. When you use Google document, what happens is Google hosts your document. It's a software as a service. This is what we're looking at here rather than having like a word, even now Microsoft does it, but think about the old word document where you have it only housed at your computer, which is in-house application. So which of the following concern is unique? Is unique to SAS, unique to that, okay? Disaster recovery capability and documented recovery procedure. I don't think that's unique to SAS. Whether you have an in-house or traditional, you're gonna have to deal with this. User credential setup and control over the action that employee can perform. I don't think that's unique to this because whether you have an in-house or a cloud, you still have to have the credential setup and control over what employees can perform. Allocation of software expense and overhead charge to departments. Again, that's gonna be with both. So with the process of elimination, I would say ownership of process data and cost migration. What happens is once you migrate to a cloud service system, software system, the ownership of the process data, that's a problem that's unique to SAS because it's in-house, you have no problem. You own the stuff and the cost of data migration. Think of just this should give you the answer, the cost of data migration. Well, that's unique. So if you're considering moving, the cost of data migration is a factor that's unique to that situation. So I would say if I don't know anything about software as a service, just knowing that we are moving to the software, the cost of data migration will be a unique challenge to this move. I would say D as a David is the answer. Number four, each of the following is a method to evaluate internal control based on the framework set by committee of sponsoring organization, COSO, except. So we have three correct answers here. So be careful about those three correct answers because we're looking for the incorrect answer. So there's only one incorrect answer. So don't read the first statement. Say, well, that sounds good. That sounds correct. Well, you're not looking for the correct. You're looking for the incorrect. So each of the following is a method to evaluate internal control, except, okay? Let's start from the bottom. Testing to determine whether the control are operating effectively and have prevented loss in the past. Do we do this? Is this a method for evaluating internal control? Sure we do. Part of monitoring, we test to determine whether the control are operating effectively. So this is one of the correct answers, which is except it doesn't apply here, okay? Identifying mitigating control to prevent losses. Well, this is based on risk assessment. When we do risk assessment, based on COSO, we identify and mitigate control to prevent losses. That's also a method to evaluate internal control. Evaluating internal control system that focus first on the risk identification of specific losses. Yes, yes, identifying risk, mitigating risk as part of the control activities. So mitigating risk control activities, evaluating internal control that focus first on risk identification as part of risk assessment. I would say by the process of elimination, A is the answer, but let's take a look at a distinguishing economy risk from industry risk and enterprise risk that has nothing to do with the evaluating internal control based on the COSO, the Committee of Sponsoring Organization. Economy risk and from industry risk, that's something that's macro on the macro economic level. It has nothing to do with COSO. So the answer is A. So again, in this situation and just by, just come, I would say I would use my common sense understanding the control activities, understanding risk assessment and understanding monitoring the five component of internal control. Hopefully it would help you answer a question like this because part of the internal control, it doesn't help us distinguish economy risk from industry risk and enterprise risk, okay? So make sure you understand internal control. That's all what I'm trying to say in COSO. COSO is important for the BEC exam. As of today, I don't have any, I have a lot about internal control in my audit class, but I don't have a COSO lecture on it. That's all, maybe I should do that in the near future. Let's take a look at this question. So I'm gonna go ahead and snip it. So this way we can work with this information. The capital structure of Merritt company is 0.2 or 20% common equity in the debt. Capital structure is 80% debt. So simply put, we have a company that rely 20% on equity, 80% on debt. This is equity and this is debt. The common stock, the common cost of common equity is 10% times 10%. And the pre-tax cost of debt is 0.5 times the cost of debt. Now, we have to remember the debt is tax deductible. The tax rate is 21%. It means we have to find out the after tax cost of debt. To find the after tax cost of debt, we're gonna take 5% times one minus 0.21 the tax rate. So let's do that. So we have one minus, let me, one minus 0.21 is 0.79 times 0.05, 0.0395, 0.0395, 0.0395. So this is the cost of that net of tax, which is good. It means although we pay 5%, but we have a tax deduction because the interest cost is, the interest cost is tax deductible, therefore our net cost of debt is 0.3.95%. I'm gonna make it 3.95%, 3.95 to keep the, so it's three, let me do this, times 3.95%. So this is the cost of that after tax. We don't have to do the same thing for equity because equity is not tax deductible. Now we are ready to multiply, 20% times 10% is 0.02 plus, now we need to multiply, 0.8 times 0.0395, that's 0.316, 0.0316, 0.02 plus 0.0316 is 0.0516, which is 5.16, therefore the cost, the weighted average cost of capital is 5.16. Now here's what I need to tell you, if you took 0.8 times 0.5, 0.05 or 5%, I'll give you 0.04, 0.04 plus 0.02, we'll give you 6%, and this will be the answer, but this will be incorrect. So the answer is therefore a reason to confuse you that 6%. You have to remember the cost of that will have to be factored after tax. After tax means you have to take your cost of that times, one minus the tax rate, whatever that tax rate is, most likely it'll be 0.1 because now the tax rate is flat in the US. Therefore, and it's gonna be lower, so the debt is good. Now, these questions are important, are important for your understanding, but what I suggest you do if you really want to study for the exam, you're gonna invest in your lifetime once for this exam to pass. Go to my website, subscribe, I have many, many, many more resources to help you pass the exam. The subscription is pretty minimal, it's not that much, and it's gonna give you access to thousands of questions, hundreds of lectures, multiple choice through false, and I'm always here to help you. Good luck and study hard.