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- This topic has 3 replies, 2 voices, and was last updated 2 weeks ago by John Moffat.
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- November 2, 2024 at 7:03 pm #712981
Hello sir! in each and every question the model answers in the Kaplan kit, seems to follow a different approach on how to calculate Issue costs in financing side effects for instance:
1) in the question TIPPLETINE CO (MAR/JUN 18) The question stated that “Issue costs for the subsidized loan and convertible loan notes would be paid out of available cash reserves” but in the model answer the issue costs were calculated as:
Debt: ($30,600,000/0.96) = $31,875,000
Debt issue costs: $31,875,000 × 0.04 = $1,275,000
This was also the case for AMBERLE CO (DEC 18)2)But in another question ROBSON CO (MAR/JUN 21), it was also stated “issue costs are
payable out of available cash reserves” this time the model answer calculated issue costs as:
$100m × 0.02 = $2,000,000
Note: issue costs are payable out of cash reserves, so the finance does not need to be
grossed upThis is just incredibly confusing as to what the right approach is the second one made sense to me, but the examiner has done the first approach in so many questions. Also, one other thing I have issue within study hub if the issue costs were grossed up the interest expense was also calculated on the gross amount, but this is also ignored in all the questions I have attempted so far.
November 3, 2024 at 2:56 pm #712997If the issue costs are to be paid out of available cash then the amount borrowed does not need to be grossed up and is just the amount needed for the investment.
If they are not being paid out of the cash reserves but out of the amount of debt raised, then we do need to gross up to calculate the total debt raised.
Usually the examiner makes it clear as to which it is but in one or two questions it was not made clear. If it does happen that it is not clear which in the question then do either but make sure that you state your assumption – then you will still get the marks 🙂
November 3, 2024 at 9:01 pm #713005Thank u for the clarification. Sorry for posting a lot of questions. I really appreciate you answering them.
November 4, 2024 at 7:55 am #713012No problem, and you are welcome 🙂
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