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Hi Sir,
With regard to the model answer given (the section right after the working (w2):
Issue cost 4/96 x $14,488 = 604
The question fifth paragraph states that issue costs are 4% of the gross finance, isn’t that we should calculate like 4/100 x $14,488 = approximately 580?
No.
The amount needed to invest is 14,488, so they need to raise more in order to cover the issue costs and still be left with 14,488. The issue costs are 4% of the total amount raised.
So….for every 100 raised, the issue costs will be 4, leaving 96 for investment.
Or to put it the other way round, for every 96 needed for investment, they need to raise 100 and the costs will be 4.
We need 14,488, so the issue costs will be 14,488 x 4/96. The total to be raised will be 14,488 x 100/96.
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