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Hi John,
Fubuki states “Issue costs are 4% of the gross finance required”.
Technically, it’s clear that Issue costs are: (4/96)*(Amount required for the project(14,488))
However, I don’t understand the following thing: if we borrow a grossed up amount (i.e. (100/96)*14,488 to pay the issue costs of 4%), then we have an increased interest rate:
I mean the tax shiled should be:
14,488*80%*5,5%*25% *(100/96)
14,488*20%*7,5%*25%*(100/96)
Whereas the examiner’s answer is just:
14,488*80%*5,5%*25%
14,488*20%*7,5%*25%Such grossing up makes the question too complicated, though without grossing up it’s
incorrect.The questions are:
1) Am I correct?
2) Should I ignore such grossing up (aiming to get all the marks)?
3) Perhaps, the following sentence mentioned in the question explains that one should ignore such grossing up:
“It can be assummed that the debt capacity available to the company is equivalent to the actual amount of debt finance raised for the project”.
Please clarify how does it relate to the grossing up, if it really does.Thank you in advance.
I think the examiners answer is wrong – the tax relief should be applied on the full amount of 14,488 x 100/96
However, to be fair to him, there is a note in his answer in bold (immediately before the final APV) which says “Full credit will be given if the issue costs are included in the funds borrowed”.
Hi John,
I’ve found the same thing in Q2 June 2014.
Again, no grossing up for the loan within the calculation of side effects.
At that, there is NO any notices for full credit for grossing up.
Why?Is it somehow related to the following sentence in the question:
“It can be assummed that the debt capacity available for Burung Co is equal to the actual amount of debt finance raised for the project”
Please explain.Thank you in advance.
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