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Sir,
In that question the PV if the issue cost not taken.
Sir if the Issue costs related to raising the finance are 2% of the gross finance required.
this means that in finance raised the issue cost also has to be added
as in order to raise the $42,970,000 we have bear the issue cost so it should be part of
fund raised. ($42,970,000+ 876.94 = 42,970,877)
So on that we should have to calculate the interest and then tax benefit.Further, sir while calculating Base case NPV for APV do we have to deduct the issue cost
from the amount raised in year 0 as under APV we do take account for PV of issue cost.Sir, kindly clarify my confusion.
First, the examiner has not been consistent in his answer and he should have calculated the tax saving on the interest on the gross amount raised (as you have written).
Second, you don’t deduct the issue costs in the base case NPV – if you did then you would be charging them twice effectively.
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