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issue cost

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › issue cost

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by John Moffat.
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  • August 12, 2021 at 3:40 pm #631346
    Anonymous
    Inactive
    • Topics: 44
    • Replies: 26
    • ☆☆

    Why the issue cost is relevant to the calculation of the TERP and I have few questions relating to that.

    1) In (MFZ Co – J/14) cash raised was 9.4m where we paid 200,000 in issuing rights shares so the total cash raised after the issue cost is 9.2m which is relevant.

    However, in (Grenarp Co – J/15) cash raised was 11.2m where we paid 280,000 in issuing rights shares so the total cash raised after the issue cost is 10.92m.

    Why is that?

    2) Is that correct that we are only considering cash raised in the calculation of the TERP.

    Could you please explain why issue cost is sometimes deducted & sometimes it is not from the cash raised???

    August 12, 2021 at 4:22 pm #631360
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Issue costs are always deducted from the cash raised, and it is the cash raised that is used for the calculation of the TERP.

    In MFZ the question says that they are investing $9.2M and that issue costs are paid out of the cash raised. Therefore in order to be able to have $9.2M available to invest they need to raise $9.4M so as to have $9.2M left after paying the issue costs.

    In Grenarp does not say that they will using $11.2M to pay off loan notes. It says that they are going to raise $11.2M, that the issue costs will be paid out of the amount raised, and that the net cash (i.e. the amount left after paying the issue costs) will be used to pay off the loan notes.

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