- This topic has 2 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
Dear Sir,
I see the difference in answer of Jun 2008 and Jun 2014 about effect of issue cost and interest on NPV.
In Jun 2008, we gross up the finance required and calculate interest for the gross amount.
But in Jun 2014, we only calculate interest on the finance used for project and not mention to interest on costs related to raising the finance.
Why are they different?
I think we should take into acount of interest on issue costs. And even if ussue costs are allowable for tax, we also get cash flow of tax saving.Something wrong in my thinking or not?!
Please help to explain.Thank you Sir
NhoIt all depends on the precise wording as to firstly whether an amount is needed for the project (and therefore more needs to be raised in order to pay the costs) and secondly as to whether the costs are to be paid out of the funds raised or are to be paid out of existing cash reserves.
If the question is not clear (and it often isn’t) then state your assumption. So much of Paper P4 (especially question 1) depends on assumptions (just as it does in real life). Provided you state your assumptions and they are reasonable, then you will still get full marks even if the examiners answer made different assumptions – there is rarely just one correct answer. (And that is why in question 1, you are almost always specifically asked to state your assumptions)
- You must be logged in to reply to this topic.