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Sir, in this question, there is an issue cost of 0.876. This is what we pay to get the loan.
So my question is should we calculate the tax shield on loan amount required? Or the loan amount plus the issue cost?
Also, should we assume that the issue costs can be tax allowable?
Thanks
It depends on the wording of the question, as to whether the issue costs are part of the amount borrowed (in which case you need to gross up for the issue costs) or whether the issue costs are paid out of existing resources.
If it is not clear in the question, the (as always in this exam) state your assumptions and you will get the marks.
With regard to whether they are tax allowable or not, then unless it is specified in the question then state your assumption. AFM tries to be a practical exam – you have to make assumptions. There is rarely just one correct answer – you have to make assumptions (just as you would do in real life). You are expected to state your assumptions and if you do the right thing based on your assumptions, then you get the marks.
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