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June 2014, Q2
1. We needed 38m to finance the project. Why are we calculating issue cost on 42.97? Where’s this figure from?
2. I know why the tax shield is being multiplied by 20%. You explained its because we’re always saving tax yearly of 20%. But why is the annual subsidy multiplied at 1-t? And what does this mean? I don’t understand its importance.
3. Why didn’t we add the TAD back after removing tax from the outflows.
Thanks.
Everything you have asked is explained in my free lectures – you really cannot expect me to type out all my lectures here!!
1. 42.97 includes the working capital needed at the start – see the cash flows at the beginning of the answer.
2. The tax saving has been calculated on all the interest. The subsidy benefit has therefore to be net of tax.
3. The currency examiner assumes that an amount equal to the TAD is needed to maintain the existing operations. Again, I explain this (and why) in my free lectures.
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