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Sorry about the silly question before
Apollo took out a new loan on 1 January 2016. This loan carries an effective interest rate of 8%. The initial proceeds of the loan are $2.5m, which is after paying issue costs of $250k. The coupon rate on the loan is 6%. Apollo must keep an interest cover ratio of 9 times under the arrangements made with the bank.
What operating profit must be maintained by Apollo in the year ended 31 December 2016, in order to meet the minimum interest cover ration specified by the bank?
the answer is 1,800,000
but my answer is 1,980,000
cuz only nominal value is used to get an interest payment which is 220,000 in this question.
I already looked over all the questions solved before about getting interest payments.
in this case, only nominal value must be used…. we haven’t considered issue costs and so on to get that interest payment.why was that issue cost considered?
“The initial proceeds of the loan are $2.5m, which is after paying issue costs of $250k.”
I believe that this is the crucial element of the question
Apollo has borrowed $2,500,000. There’s no specific information that says that the amount of $2,500,000 is the net figure of $2,750,000 – issue costs of $250,000 = $2,500,000
What would the loan figure be if that $250,000 had been paid from existing resources?
Can you give me an exam reference date?
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