- This topic has 5 replies, 2 voices, and was last updated 10 years ago by
.
- Posts
Dear John Moffat,
I’ve tried Question 34 Strayer Inc. It says that the company is considering to invest $25m, which will be financed by internal funds-6m, rights issue-10m and loans-9m.
There is no note whether these are quoted net of issue costs or not.
So, when calculating the isuue costs don’t we need to gross them up?
In the answer to this question issue costs are calculated on 10m and 9m respectively without grossing up.
In my opinion, they should be grossed up, since it says that the company needs 25m for the investment, which I think is the net amount.
Thank you in advance!
I assume that by “Question 34” you are referring to a question in one of the revision kits, but you do not say which one!!
In general, however, if it is not clear whether or not to gross up (and sometimes it is not) then provided you state your assumptions you will get the marks whether you do or not.
So much of Paper P4 depends on your assumptions (certainly for question 1 in the exam there is rarely one ‘correct’ answer because it depends on what assumptions are made). That is why virtually always the examiner specifically asks you to state your assumptions.I don’t have the Kaplan Study Text, but I have found the question elsewhere.
It does depend on your assumptions.
However, had the question said that the issue costs were 1% of the amount raised, then we certainly would have had to gross up.
Here it did not say that and therefore it has been assumed that the 1% was paid out of existing cash resources and that the amount borrowed was just the $25M.
- You must be logged in to reply to this topic.