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Hi tutor,
1-We always deduct issue cost from base case npv no matter it is allowable for tax purpose or no, is it correct?
2-
when the question says that issue cost is tax allowable and it is 4% of gross amount requiredSo first we find the tax benefit on issue cost and then calculate tax benefit on loan, so if we add issue cost to the loan amount, is it correct?
Or should we find tax benefit of loan amount excluding issue cost as we are already doing separate calculations for tax benefit on issue cost
3-
In question Dec 2010 fubuki
it says issue cost are 4% of gross finance required., they didn’t find tax benefit in issue cost and for tax benefit on loan, they used amount excluding issue cost, what if we include issue cost to find tax benefit on loan,
Plz elaborate
Thanks1 Yes – always deduct issue costs
2&3 There are two separate issues here. Firstly, as to whether the issue costs themselves are tax allowable, then (unless obviously the question specifically says) whatever you do is an assumption and provided you state your assumptions you get the marks. The examiner assumed that they weren’t tax allowable (and he should really have stated his assumption) and so best is in future to make the same assumption.
The second issue is as regards the loan. Here I disagree with the examiner. Since he says that the costs are 4% of the gross finance required, I do agree (and I guess you do as well) with the amount of the issue costs. However, because of that, he should really have calculate the interest (and therefore the tax relief on the interest ) on the full amount raised (i.e. 100/96 x 14,488). He could argue that he has based it on debt capacity, but I think he is wrong.
However, the lesson to learn is to always state your assumptions (and look how many assumptions he has listed in his answer anyway!). Provided your assumptions are sensible then you still get the marks, even if it leads to different final answers.
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