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Good Morning Sir!
I have 3 questions, but will ask them one by one – its quite possible that the first one answers them all..:) so please dont close this thread….
Issue costs: the sentence says: “issue costs are estimated to be 1% for debt financing…”
question: i assumed that he is talking net of costs and used (1/99) x 5 and (4/96) x 10 for equity. in the answer, he is simply taking percentages … 1% of 5m and 4% of 10m.
in order to apply the 1/99, the question must specify ‘net of’?
regards
Unless it is clearly specified more, then it can be taken either way and you would get marks for either way.
As always P4, it is important you state your assumption, and if you have then you still get the marks.
thank u!!…now my next question….
it said in the question that the “residual value at the end of year 10 is $5m after tax”
so, i thought he was talking depreciation and i calculated the tax savings on 17.9m (25-7.1), where 7.1 will be the pre tax residual value.
obviously my numbers were all different from the answer.
question: how to read the question and figure out if the tax savings on depreciation need
to be calculated?regards
The examiner assumed that ‘after tax’ meant that it was after any tax balancing charges/allowances – there is no other tax that could be relevant.
However, appreciate that this question was 16 years ago and that the examiner has changed twice since then. The current examiner is more clear about things in his questions.
But, as always for P4, state your assumptions. If they are sensible assumptions then you will still get the marks.
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