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Hi Sir, I have some doubts related to issue costs, would really appreciate your help!
1) Do we deduct tax while calculating the issue costs?
2) When and when not is issue cost included in the Total Debt Raised?
3) In a question where we’ve grossed up the issue costs, do we pay interest on the ‘Initial Investment + Issue Cost’ or just the amount of ‘Initial Investment’?
1. Whether they are tax allowable depends on the working for the question. Usually questions state that they are not tax allowable.
2. Again it depends on the question as to whether the debt raised is the amount needed for the project plus the issue costs, or is just the amount needed for the project (and so the issue costs are being paid out of existing cash reserves). It is not always clear in exam questions as to which is the case and if so state what you have assumed and then you will still get the marks whether the examiners answer has made the same assumption as you or not.
3. The interest is always based on the total amount of debt raised.
In Fubuki, the question says the issue costs would be 4% of the gross finance reqd.
This means that the total amount of debt raised = ‘Initial Investment / 96%’But in the answer, the interest has been paid on just the ‘Initial Investment + WC’ amount. Why is the issue cost not considered?
Matter of fact, I saw Amberle (Dec 18) as well. In that question as well the examiner has paid interest on just the initial investment amount and not the ‘Initial Investment + Issue Costs’ amount.
In both cases the wording of the question can be read in two ways and so just as I wrote in the second point of my previous reply, you would get the marks either way (but should state your assumption). Appreciate that there is rarely just one correct answer to AFM questions because it depends on assumptions (just as in real life) which is why you should always state your assumptions.
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