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ASA AM practice questions

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Question 1Appraisal Review & Management (ARM)

Which document establishes the scope of work, intended use, and reporting requirements for an appraisal assignment?

  1. The subject property's deed
  2. The certified general appraiser's license
  3. The engagement letter or contract with the client Correct answer.
  4. The multiple listing service data sheet

Explanation

The scope of work and assignment elements are defined through the client engagement, which sets intended use, intended users, and reporting requirements. License, deed, and MLS data are inputs or credentials, not the defining assignment document.

Question 2Appraisal Review & Management (ARM)

In appraisal review, the term 'intended use' refers to:

  1. The highest and best use of the subject property
  2. The purpose the client has for the review opinion Correct answer.
  3. The physical use of the property as currently improved
  4. The method used to verify comparable sales

Explanation

Intended use describes how the client will employ the reviewer's opinion, which drives scope and reporting decisions. Highest and best use and physical use relate to the property, not to the client's purpose for the review.

Question 3Appraisal Review & Management (ARM)

An appraisal reviewer finds that a report omits the reconciliation of value indications. This deficiency most directly concerns which reporting requirement?

  1. The requirement to disclose the appraiser's prior sales
  2. The requirement to describe the neighborhood boundaries
  3. The requirement to include a legal description
  4. The requirement to state and support the final opinion of value Correct answer.

Explanation

Reconciliation is the step that explains how competing value indications were weighed to reach the final opinion. Omitting it undermines the support for the concluded value rather than title, neighborhood, or prior-sale disclosures.

Question 4Appraisal Review & Management (ARM)

A review assignment calls for the reviewer to develop an independent opinion of value rather than merely evaluate the original report. This engagement is best described as:

  1. A compliance audit of the appraiser's license
  2. A desk review limited to data accuracy
  3. An administrative review of report completeness
  4. A comprehensive review with an independent value conclusion Correct answer.

Explanation

When the reviewer must reach his or her own value opinion, the assignment exceeds evaluation and becomes a comprehensive review with an independent conclusion. Administrative and desk reviews stop at checking completeness or data without forming a new value.

Question 5Appraisal Review & Management (ARM)

A reviewer is checking whether the original appraiser's comparable sales were verified with a party to the transaction. Which review judgment is being applied?

  1. Reasonableness of the extraordinary assumption
  2. Adequacy and appropriateness of data verification Correct answer.
  3. Accuracy of the cost approach depreciation
  4. Consistency of the certification statement

Explanation

Confirming that sales were verified with a party to the transaction tests the adequacy and appropriateness of data verification. Assumptions, certifications, and depreciation are separate review judgments.

Question 6Appraisal Review & Management (ARM)

Which of the following is the most appropriate action when a reviewer cannot resolve a material discrepancy in the original report?

  1. Silently disregard the original report's conclusion
  2. Disclose the discrepancy and its effect on the review opinion Correct answer.
  3. Adopt the original appraiser's value without comment
  4. Withdraw from the assignment without explanation

Explanation

Unresolved material discrepancies must be disclosed along with their effect on the reviewer's conclusions. Ignoring them or adopting unsupported conclusions compromises the review's credibility.

Question 7Appraisal Review & Management (ARM)

A review report's certification typically requires the reviewer to affirm that:

  1. The subject property was listed on the MLS
  2. The original appraiser was personally interviewed
  3. The reviewer inspected all comparable sales
  4. Compensation was not contingent on a predetermined value Correct answer.

Explanation

Review certifications affirm independence, including that compensation is not contingent on a predetermined result. Personal inspection of comparables, interviews, and MLS listing status are not universal certification requirements.

Question 8Appraisal Review & Management (ARM)

The primary purpose of an appraisal management company's quality control review is to:

  1. Ensure reports conform to engagement and regulatory standards before delivery Correct answer.
  2. Establish the market value of the subject property independently
  3. Set the appraiser's fee schedule for future assignments
  4. Provide marketing services to the lender's clients

Explanation

Quality control review verifies that a completed report meets engagement requirements and applicable standards before it reaches the end user. It does not develop an independent value or perform marketing or fee-setting functions.

Question 9Appraisal Review & Management (ARM)

A reviewer notices that the original report's effective date precedes the date of an ordinance that rezoned the property. What is the most significant review concern?

  1. Whether the report properly reflects conditions as of the effective date Correct answer.
  2. Whether the report included the client's name
  3. Whether the report used a narrative format
  4. Whether the appraiser held a current license on the report date

Explanation

Value must reflect market conditions and property status as of the stated effective date, so a later zoning change should not be applied retroactively. License status, client name, and report format do not affect the effective-date analysis.

Question 10Appraisal Review & Management (ARM)

Which action best demonstrates the reviewer's independence?

  1. Declining an assignment to review a report the reviewer previously prepared Correct answer.
  2. Accepting a bonus tied to confirming the original value
  3. Using the original appraiser's workfile as the sole data source
  4. Deferring to the lender's preferred value conclusion

Explanation

Independence requires avoiding conflicts such as reviewing one's own work, since a reviewer cannot objectively evaluate a report he or she authored. Bonuses, reliance on a single source, and deference to a client's preference all compromise objectivity.

Question 11Appraisal Review & Management (ARM)

A reviewer evaluating whether the original appraiser's highest and best use analysis is credible should focus primarily on:

  1. Whether the appraiser used a specific valuation software
  2. Whether the neighborhood has changed in the last decade
  3. Whether the analysis is legally permissible, physically possible, financially feasible, and maximally productive Correct answer.
  4. Whether the property has been recently listed for sale

Explanation

Highest and best use is tested through the four standard criteria: legal permissibility, physical possibility, financial feasibility, and maximum productivity. Listing status, long-term neighborhood change, and software choice are not the governing tests.

Question 12Appraisal Review & Management (ARM)

In the review process, 'agreeing with the original value' without independent analysis is best characterized as:

  1. An acceptable administrative review outcome
  2. A comprehensive review with an independent conclusion
  3. A valid desk review of data accuracy
  4. An unsupported concurrence that fails to demonstrate review analysis Correct answer.

Explanation

A reviewer must perform analysis sufficient to support agreement or disagreement; mere concurrence without analysis lacks support. It is not a comprehensive review, a data-accuracy desk review, or an administrative outcome.

Question 13Appraisal Review & Management (ARM)

Which record should a reviewer retain to support the review opinion?

  1. Only the original appraiser's report
  2. The review workfile documenting data, analysis, and conclusions Correct answer.
  3. The lender's loan origination file
  4. The county tax assessor's website printout

Explanation

The reviewer must maintain a workfile that documents the data considered, analyses performed, and conclusions reached. The original report alone, the lender's file, and a single printout do not document the reviewer's own work.

Question 14Appraisal Review & Management (ARM)

A reviewer finds that the original report used an extraordinary assumption without stating it. What is the primary concern?

  1. The report may have used the wrong font
  2. The report's conclusions may lack transparency about the hypothetical condition relied upon Correct answer.
  3. The appraiser's license may have expired
  4. The comparable sales may be too recent

Explanation

Extraordinary assumptions must be clearly stated because they affect the validity of the value conclusion; omitting them hides a condition the reader relies upon. License status, sale recency, and formatting do not relate to assumption disclosure.

Question 15Appraisal Review & Management (ARM)

The reviewer's conclusion that a report is 'not credible' should be supported by:

  1. The length of the original report
  2. Specific deficiencies identified and their effect on the report's conclusions Correct answer.
  3. The client's stated preference for a different value
  4. The reviewer's general impression of the appraiser

Explanation

A credibility conclusion must rest on identified deficiencies and an explanation of how they affect the report's conclusions. General impressions, client preference, and report length are not valid bases.

Question 16Appraisal Review & Management (ARM)

Which best describes the reviewer's obligation when the original appraiser's scope of work was narrower than the assignment required?

  1. Re-perform the entire appraisal from scratch
  2. Identify the scope deficiency and assess whether it undermines the report's conclusions Correct answer.
  3. Assume the appraiser had a valid reason and ignore it
  4. Report the appraiser to the state board immediately

Explanation

The reviewer evaluates whether the scope of work was sufficient for the assignment and whether any deficiency affected the conclusions. Ignoring it, automatically re-performing the appraisal, or immediate reporting are not the standard response.

Question 17Appraisal Review & Management (ARM)

In appraisal management, 'appraiser independence' requirements generally prohibit a lender or AMC from:

  1. Influencing an appraiser to hit a predetermined value target Correct answer.
  2. Providing the appraiser with a copy of the purchase contract
  3. Ordering an appraisal through a third-party platform
  4. Requiring the appraiser to carry liability insurance

Explanation

Independence rules prohibit coercion or influence to reach a predetermined value. Providing contracts, using ordering platforms, and insurance requirements are permissible administrative practices.

Question 18Appraisal Review & Management (ARM)

Which of these is the best example of an appraisal review 'desk review'?

  1. A physical measurement of the subject's gross living area
  2. An evaluation of the report and available data without a property inspection Correct answer.
  3. An interview of the borrower about the property condition
  4. A full interior and exterior inspection of the subject property

Explanation

A desk review evaluates the report and available data from the reviewer's location without inspecting the property. Inspections, borrower interviews, and measurements are field activities beyond a desk review.

Question 19Appraisal Review & Management (ARM)

A reviewer observes that the original report's cost approach used an effective age inconsistent with the physical condition described. This is primarily a review of:

  1. The appraiser's continuing education record
  2. The client's intended use statement
  3. The zoning classification of the property
  4. Internal consistency of the report's analysis Correct answer.

Explanation

Comparing effective age to the described condition tests whether the report is internally consistent. Education records, intended use, and zoning are separate matters.

Question 20Appraisal Review & Management (ARM)

Which statement best describes the reviewer's role regarding the original appraiser's opinion?

  1. The reviewer replaces the original appraiser's license
  2. The reviewer must always reach a different value
  3. The reviewer forms an independent judgment about the report's credibility Correct answer.
  4. The reviewer must always agree with the original value

Explanation

The reviewer independently evaluates credibility and may agree or disagree with support. The role does not require a different value, mandate agreement, or involve licensing authority.

Question 21Appraisal Review & Management (ARM)

A lender asks an AMC to reassign an appraisal to a different appraiser to obtain a higher value. The AMC should:

  1. Comply because the lender is the client
  2. Refuse the request as an improper attempt to influence value Correct answer.
  3. Ask the appraiser to revise the value upward
  4. Comply but note it in the report

Explanation

Reassignment to obtain a different value is an improper influence that violates independence requirements. Compliance or pressuring the appraiser to revise upward would be improper.

Question 22Appraisal Review & Management (ARM)

Which element is essential to a review report's identification of the assignment?

  1. The intended users of the review Correct answer.
  2. The listing agent's contact information
  3. The borrower's credit score
  4. The appraiser's favorite valuation approach

Explanation

Identifying intended users is a required assignment element because it defines who may rely on the review. Valuation preferences, credit scores, and agent contacts are not assignment-identification elements.

Question 23Appraisal Review & Management (ARM)

A reviewer determines the original report's sales comparison adjustments are directionally inconsistent with market data. The most appropriate review conclusion is that the:

  1. Report is automatically fraudulent
  2. Comparable sales must be discarded entirely
  3. Appraiser's license should be revoked
  4. Report's value conclusion may not be supported and requires explanation Correct answer.

Explanation

Directionally inconsistent adjustments raise support concerns that the reviewer should explain, but they do not by themselves establish fraud or license violations. Discarding all comparables is an overreaction.

Question 24Appraisal Review & Management (ARM)

The reviewer's opinion of the quality of the original report should be:

  1. Supported by citations to specific portions of the report Correct answer.
  2. Based solely on the reviewer's experience
  3. Withheld to avoid conflict
  4. Determined by the client's satisfaction

Explanation

Quality conclusions must be tied to specific report content so the client can understand the basis. Experience alone, client satisfaction, and withholding findings are inadequate.

Question 25Appraisal Review & Management (ARM)

Which practice best supports an AMC's compliance with appraiser independence rules?

  1. Allowing loan officers to select the appraiser directly
  2. Separating order intake from appraiser selection and fee negotiation Correct answer.
  3. Permitting sales staff to pressure appraisers on turnaround
  4. Tying appraiser fees to value outcomes

Explanation

Independence is strengthened by separating production functions from appraiser selection and fee setting. Direct loan officer selection, outcome-based fees, and sales pressure all undermine independence.

Question 26Appraisal Review & Management (ARM)

In appraisal review, the reviewer's own value conclusion, when one is developed, is properly described as:

  1. A statement of the most probable sale price guaranteed by the reviewer
  2. A restatement of the original appraiser's value adopted without analysis
  3. An opinion of the value of the subject property developed independently by the reviewer Correct answer.
  4. A finding limited to arithmetic accuracy of the original report

Explanation

A reviewer who develops a value conclusion is providing the reviewer's own independent opinion, supported by the reviewer's own analysis and workfile. The original opinion is evidence to be weighed, not a figure to be adopted or guaranteed.

Question 27Appraisal Review & Management (ARM)

A review report states that the original appraisal is 'not credible' but offers no supporting analysis. The most significant deficiency in the review report is that it:

  1. Fails to identify the intended users of the review
  2. Omits the reviewer's state certification number
  3. Does not restate the original appraiser's entire report
  4. Lacks the reasoning and evidence needed to support the reviewer's conclusion Correct answer.

Explanation

A review conclusion, particularly an adverse one, must be supported by analysis and evidence so the reader can follow the reviewer's reasoning. Identification details and certifications are required elements, but their absence is not the deficiency described here.

Question 28Appraisal Review & Management (ARM)

An appraisal management company assigns an order to a panel appraiser who is a close relative of the loan officer handling the file. Under appraiser independence principles, the AMC should:

  1. Proceed because the appraiser is on the approved panel
  2. Proceed if the loan officer discloses the relationship to the borrower
  3. Ask the loan officer to co-sign the appraisal report
  4. Reassign the order to a qualified appraiser without the conflict Correct answer.

Explanation

Independence requires that the appraiser have no interest in the property or the transaction and no relationship that could influence the result. A close family tie to a party to the transaction creates a conflict that panel membership does not cure.

Question 29Appraisal Review & Management (ARM)

A reviewer is examining an income approach in which the original appraiser capitalized net operating income using a rate derived from comparable sales. The most appropriate reviewer test is whether the:

  1. Income approach was given the greatest weight in reconciliation
  2. Gross income multiplier was also developed
  3. Capitalization rate is traceable to market evidence and applied consistently with the income estimate Correct answer.
  4. Report includes a rent roll signed by the borrower

Explanation

The reviewer tests whether the rate is supported by market data and whether it is matched correctly to the income figure being capitalized. Supporting documents and alternative techniques are secondary to that internal consistency and market support.

Question 30Appraisal Review & Management (ARM)

When an appraisal management company retains an appraisal workfile after the report is delivered, the workfile should be kept for at least:

  1. Until the loan is repaid
  2. One year from delivery
  3. 30 days from delivery
  4. The period specified by applicable requirements, commonly five years Correct answer.

Explanation

Retention requirements commonly call for keeping the workfile for at least five years after preparation or at least two years after final disposition of the litigation or similar proceeding, whichever is later. Short fixed periods such as 30 days or one year do not satisfy those requirements.

Question 31Appraisal Review & Management (ARM)

An AMC wants to strengthen its quality control program. Which practice most directly supports consistent review of appraisal reports before delivery?

  1. Using a documented checklist tied to applicable standards and assignment conditions Correct answer.
  2. Reviewing only reports that exceed a predetermined value threshold
  3. Limiting review to confirming that all signature fields are complete
  4. Allowing each reviewer to apply personal criteria with no written guidance

Explanation

A documented, standards-based checklist gives reviewers consistent criteria and creates an auditable record of what was examined. Personal criteria, value-based screening, and signature-only checks leave substantive quality unaddressed.

Question 32Appraisal Review & Management (ARM)

A reviewer finds that the original report's site value in the cost approach is derived from land sales that are several years old in a market where land prices have risen sharply. The reviewer's most appropriate conclusion is that the:

  1. Report is fraudulent and must be reported to the state regulator
  2. Site value may be understated and the sales should be updated or replaced with more current evidence Correct answer.
  3. Land sales are irrelevant because the cost approach relies only on depreciation
  4. Cost approach is invalid and must be disregarded entirely

Explanation

Stale land sales in a rising market tend to understate site value, so the reviewer should test whether more current or adjusted evidence supports the figure. One weak component does not by itself invalidate the entire approach or establish fraud.

Question 33Appraisal Review & Management (ARM)

An appraisal review assignment is received with no statement of the review's intended use. The reviewer's best course of action is to:

  1. Obtain clarification of intended use and scope before accepting or completing the review Correct answer.
  2. Assume the review is for lending purposes and proceed
  3. Complete the review and note the missing information in the addendum
  4. Decline the assignment because reviews always require a written engagement

Explanation

Intended use and scope drive the review's development and reporting, so ambiguities should be resolved with the client before the work is performed. Proceeding on assumptions or documenting the gap after the fact risks producing a review that does not serve its purpose.

Question 34Appraisal Review & Management (ARM)

In reviewing a report's reconciliation, the reviewer observes that the appraiser averaged the values from all three approaches with no explanation. The reviewer should conclude that the reconciliation is:

  1. Weak because reconciliation requires reasoned weighting rather than simple averaging Correct answer.
  2. Acceptable if the three approaches produced similar values
  3. Acceptable because averaging is a recognized reconciliation method
  4. Deficient only if the final value falls outside the range of the approaches

Explanation

Reconciliation requires the appraiser to weigh the relevance and reliability of each approach given the property and market, not merely to average results. Similarity of the indicated values does not substitute for that reasoning.

Question 35Business Valuation (BV)

Which concept holds that the value of a business is determined by the present value of the cash flows it is expected to generate in the future?

  1. The income approach Correct answer.
  2. The asset-based approach
  3. The market approach
  4. The cost approach

Explanation

The income approach derives value by discounting expected future economic benefits to a present value. The market and cost approaches rely on comparable transactions or replacement cost rather than projected cash flows.

Question 36Business Valuation (BV)

In a discounted cash flow model, which discount rate is most appropriate for valuing the entire enterprise (debt plus equity)?

  1. The risk-free rate
  2. The weighted average cost of capital Correct answer.
  3. The after-tax cost of debt
  4. The cost of equity

Explanation

Free cash flow to the firm is generated for all capital providers, so it must be discounted at a blended rate reflecting both debt and equity, which is the WACC. Using only one component would mismatch the cash flow with the required return.

Question 37Business Valuation (BV)

A valuation analyst selects guideline public companies to derive pricing multiples. This practice is most characteristic of which valuation approach?

  1. The market approach Correct answer.
  2. The cost approach
  3. The income approach
  4. The liquidation approach

Explanation

The market approach estimates value from observed prices of comparable assets or businesses, including guideline public companies and precedent transactions. It relies on relative pricing rather than projected cash flows or replacement cost.

Question 38Business Valuation (BV)

Which of the following best describes the guideline company method of the market approach?

  1. Discounting the subject company's projected cash flows at the WACC
  2. Estimating the cost to recreate the subject company's tangible assets
  3. Adjusting the subject company's book value for inflation
  4. Applying multiples derived from similar public companies to the subject company's financial metrics Correct answer.

Explanation

The guideline company method applies valuation multiples observed for publicly traded comparables to the subject company's operating metrics. Adjustments are then made for differences in size, growth, and risk.

Question 39Business Valuation (BV)

Which of the following is generally considered a marketability discount?

  1. A reduction applied because the interest represents a minority position
  2. An increase reflecting superior growth prospects
  3. A reduction applied because the ownership interest lacks ready access to a public trading market Correct answer.
  4. A premium applied for expected synergies

Explanation

A discount for lack of marketability reflects the difficulty of converting an ownership interest to cash quickly at a fair price. It is distinct from discounts tied to the degree of control.

Question 40Business Valuation (BV)

When valuing a minority, noncontrolling interest, an analyst typically applies which adjustment relative to a controlling interest value?

  1. A blockage discount
  2. An acquisition premium
  3. A discount for lack of control Correct answer.
  4. A control premium

Explanation

Minority interests generally lack the ability to direct the business or its cash flows, so a discount for lack of control is often applied to a controlling interest value. This reflects the reduced influence over decisions and distributions.

Question 41Business Valuation (BV)

Which standard of value is most commonly required for federal gift and estate tax valuations?

  1. Investment value
  2. Fair market value Correct answer.
  3. Intrinsic value
  4. Fair value for financial reporting

Explanation

Federal tax regulations define value for gift and estate purposes as fair market value, generally the price at which property would change hands between a willing buyer and seller. Each standard of value can produce different conclusions.

Question 42Business Valuation (BV)

Which of the following would most likely increase the discount rate applied in an income approach valuation?

  1. An increase in the subject company's operating risk Correct answer.
  2. A decrease in the risk-free rate
  3. An increase in the expected growth rate holding risk constant
  4. A decrease in the subject company's operating risk

Explanation

The discount rate compensates investors for risk, so greater operating risk raises the required return. Higher required returns reduce the present value of expected cash flows.

Question 43Business Valuation (BV)

An analyst capitalizes a normalized earnings figure using a capitalization rate of 20%. If the normalized earnings are $500,000, what is the indicated value?

  1. $100,000
  2. $10,000,000
  3. $2,500,000 Correct answer.
  4. $1,000,000

Explanation

Value under direct capitalization equals normalized earnings divided by the capitalization rate, so $500,000 / 0.20 = $2,500,000. The capitalization rate is the inverse of the multiple.

Question 44Business Valuation (BV)

A company's free cash flow to the firm is projected at $2,000,000 next year, growing at a constant 3% per year thereafter. The WACC is 11%. Using the Gordon growth model, what is the indicated enterprise value?

  1. $22,222,222
  2. $28,571,429
  3. $25,000,000 Correct answer.
  4. $18,181,818

Explanation

Under the Gordon growth model, value equals next year's cash flow divided by the spread between the discount rate and growth rate: $2,000,000 / (0.11 - 0.03) = $25,000,000.

Question 45Business Valuation (BV)

Which of the following best describes normalization adjustments in a business valuation?

  1. Adjustments that restate historical assets to replacement cost
  2. Adjustments that convert accrual accounting to cash accounting for tax purposes
  3. Adjustments that apply market multiples to comparable companies
  4. Adjustments that remove nonrecurring items and align owner compensation to market levels to reflect sustainable earnings Correct answer.

Explanation

Normalization adjusts reported financials so the earnings reflect ongoing economic reality, such as removing nonrecurring gains or losses and setting owner compensation to market levels. These adjustments make earnings more representative of future performance.

Question 46Business Valuation (BV)

An analyst values a company using the market approach and observes a comparable company with a price-to-earnings multiple of 12.0x. If the subject company's normalized earnings are $3,000,000, what is the indicated equity value before any adjustments?

  1. $36,000,000 Correct answer.
  2. $30,000,000
  3. $360,000,000
  4. $25,000,000

Explanation

The price-to-earnings multiple is applied to normalized earnings: 12.0 x $3,000,000 = $36,000,000. This yields an indicated equity value before any discounts or premiums.

Question 47Business Valuation (BV)

Which of the following is the most likely effect of applying a discount for lack of marketability to a closely held business interest?

  1. It decreases the value relative to an otherwise identical freely traded interest Correct answer.
  2. It has no effect on value
  3. It doubles the indicated value
  4. It increases the value relative to an otherwise identical freely traded interest

Explanation

A discount for lack of marketability reduces value to reflect the difficulty of selling an illiquid interest. It is applied to a value that would otherwise assume ready marketability.

Question 48Business Valuation (BV)

Which of the following best describes the build-up method for estimating a discount rate?

  1. Starting with a risk-free rate and adding premiums for equity risk, size, and company-specific risk Correct answer.
  2. Averaging the discount rates used in comparable company valuations
  3. Using the company's marginal borrowing rate as the discount rate
  4. Deriving the rate from the company's historical return on assets

Explanation

The build-up method constructs a discount rate additively, beginning with a risk-free rate and layering premiums for equity risk, size, and company-specific factors. It is often used for closely held companies without a measurable beta.

Question 49Business Valuation (BV)

A valuation analyst uses the adjusted net asset method. Which statement best describes the resulting value indication?

  1. It reflects the present value of future cash flows discounted at the WACC
  2. It reflects the value of individual assets and liabilities restated to fair value less liabilities Correct answer.
  3. It reflects prices paid for comparable businesses
  4. It reflects the company's going-concern value based on earnings multiples

Explanation

The adjusted net asset method restates each asset and liability to fair value and subtracts liabilities to arrive at an equity value. It is often used when the asset base, rather than earnings, drives value.

Question 50Business Valuation (BV)

An analyst computes a weighted average cost of capital using 60% equity at a 14% cost and 40% debt at a 6% after-tax cost. What is the WACC?

  1. 10.8% Correct answer.
  2. 11.2%
  3. 9.6%
  4. 8.4%

Explanation

WACC equals the weighted average of the after-tax component costs: (0.60 x 14%) + (0.40 x 6%) = 8.4% + 2.4% = 10.8%. The debt cost is already stated on an after-tax basis.