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I can’t seem to wrap my head around the concept of debt capacity on which tax shield will be based.
For eg:
In question Burung Company (12/10), the amount to cover all investments is grossed up to calculate the total finance that needs be raised (which i understand). However issue costs (876.9) is not included in the funds borrowed ( $42.97 m) on which tax shields and other benefits are calculated.
Whereas, for a similar question of Daron, the Funds borrowed includes the issue costs on which tax shield are calculated.
Does this mean that we can do it both way with or without incorporating issue costs by clearly stating the assumption or is there anything that i am missing ?It really depends on whether you are told the amount raised (in which case the issue costs are based on the amount raised) or the amount needed to the project (which was case it needs grossing up for the issue costs).
However it is often not clear in the question, in which case do it either way but make sure (as you have written) that you clearly state your assumption.
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