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Hi John,
I have a question about the APV issue cost. Both questions below are payable out of cash reserve, but I am unsure why one gross up (2018MJQ2), but the other one (2021MJQ1) does not gross up when calculating the issue cost?
According to 2021MJQ1 (Robson co), the question states that issue costs of 2% are payable on gross external financing and out of available cash reserve.
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suggested answer:
$100m x 0·02 = $2,000,000 (Note: Issue costs are payable out of cash reserves, so the finance does not need to be grossed up)—–
However, in the case of 2018March Q2 (Tippletine co), the question states that:
Issue costs for the subsidised loan and convertible loan notes would be paid out of available cash reserves.—-
suggested answer:
Debt: ($30,600,000/0·96) = $31,875,000
Debt issue costs: $31,875,000 x 0·04 = $1,275,000Thanks in advance!:)
Tippletime was badly worded in that in one place it says that issue costs area % of the gross since raised (which implies grossing up), whereas in another place it says that the issue costs are paid out of cash reserves (which implies no grossing up). The examiner accepted this and either was given full marks. (To be safe, just make sure you write down your assumption 🙂 )
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