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Hello John
Hope you are well
i have 3 questions:
1) i am very nervous and scared about getting marks penalized for silly rounding errors. lets say if my discount rate calculation comes to 12.95%. then will i get marks if by some mistake i write 12.97% or is it always sensible to round it off to the nearest whole number say for example 13%. how many marks are we going to loose because of roundings? i guess the examiner will be rather more interested in our workings? isn’t it?
2) when we raise issue costs as well apart from the loan to finance our project then i would imagine that we take the issue costs * with (1-T) to get the final number to be included in our APV calculations. we dont normally discount the issue costs. is that right?
3) lets say we have 500 to raise and 3% of issue costs are also required to be raised. so in total we would raise 500/0.97 = 515.46. next we take 3% of this * 1-t to get our issue costs.
lets say interest is 8%.
Which figure we do use to calculate the interest for the PV of the tax shield?
I think we take 500 * 8% = 40 * (1-T) and then discount it
we will never calculate interest from the gross amount that we raised of 515.46 that included the issue costs as well. its always 500.
is that correct?
thanks
1. You do not lose marks for rounding – as you have written, the marks are for your workings rather than for the final answer.
2. The issue costs are not discounted because the are payable immediately.
3. It depends on the wording of the question as to whether the issue costs increase the actual amount borrowed (and therefore the interest payable) or not. If it is not clear from the wording of the question then state your assumption and then you will still get the marks.
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