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Hi.
Could anyone please explain when we are calculating issue costs in Financing side effects, do we calculate the issue costs on the gross debt or just the amount of loan required? ( for example: calculating issue costs of 2% on a loan of 42.97m. Do we get marks if we calculate as 2% x 42.97 = 0.8594 OR we have to calculate as 2/98 x 42.97)
And if in the question it says issues costs are calculated on gross debt, how would that affect the calculations?
Thanks.It depends on the wording of the question as to whether the issue costs are paid out of the debt raised or out of existing funds.
If they are paid out of existing funds, then the issue costs will be 2% of the amount raised (i.e. 2% of the amount needed for the investment).
If they are paid out of the debt raised then the issue costs will still be 2% of the debt raised but will be 2/98 times the amount needed for the investment (the debt raised will be 100/98 times the amount needed for the investment).
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