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Hi Mr Moffat
Treatment of issue costs in APV calculation – noted that there is a difference between amount raised and amount required . For example if they say amount required is $40k of which 10% is debt and issue costs are 2% on gross debt. tax is 30 %. Will I be right to calculate as follows: 10%*$40K =$4K (debt to be required); then issue costs will be $4K*2/98 =$82 . Which means we need to raise debt of $4081 (inclusive of the issue cost).
PV of the issue costs will be $82* 0.7 (to adjust for the tax deductible debt) =$57Whats the difference between amount raised and amount required
It depends on how the issue costs are being paid. If they are being paid out of the amount raised, then what you have done is correct.
If, on the other hand, they are being paid out of existing cash, then the debt raised would be $4K and the issue costs will be $80.It is not always clear which it is in the exam. If it is not clear then state your assumption and you will still get the marks.
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