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Issue costs for the subsidised loan would be paid out of available cash reserves. Shouldn’t it be calculated as 4% × $30.6m?
I don’t understand why the examiner’s answer shows the calculation of 4%/96% × $30.6m when the issue costs are not paid out from the proceed of the loan.
Thank you in advance for your explanation.
In the question is says that the issue costs are 4% of the gross finance required.
I appreciate that later it says the issue costs are paid out of available cash reserves, but the examiner’s logic is that wherever the issue costs are coming from then it still needs financing (the reserves belong to shareholders and so using some to pay issue costs is in a sense extra financing).
However, it is badly worded – the bit about available cash reserves was really there to make it clear there was no tax effect, but it is confusing. You would still have got the marks if you had treated the issue costs as 4% x $30.6M, even though obviously the final answer would differ.
Sir i am confused about the gross finance i calculated issue cost as 33600/96%×100% ie 35000
35000×4%=1400
As the net cash flows including the working capital are 33600 so it will be the net investment so arent we required to take it in calculation instead of 30600
No. The question specifically refers to financing the $30.6M. There is no mention of raising finance to cover the working capital – this must therefore be financed out of available cash reserves.
Then why we have calculated issue cost in qs BURUNG co june 2014 on $42.97m which is the finance including working capital also
Tippletine specifically says that the finance raised is $30.6M (which excludes the working capital).
The question Burung does not state this anywhere and so it is up to you to make an assumption (most questions in the AFM depend on the assumptions made, which is why you must always state your assumptions – there is rarely just one correct answer.)
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