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Issue costs
Debt: ($30,600,000/0.96) = $31,875,000
Debt issue costs: $31,875,000 *0.04 = $1,275,000I guess the reason why the examiner divided the target financing amount by 0.96 might be to cover 4 percent of issue cost. Is it ok to do 30,600,000 * 1.04 instead of dividing it by 0.96?
thank you very much.
No.
It is because the question says that 30.6M is needed for the investment. Therefore the amount raised needs to be higher such that after paying 4% of the amount raised, then the 96% remaining needs to be 30.6M.
However it is a very minor error and you would not lose many (if any) marks 🙂
Thank you for your clear and intuitive explanation. Regarding the question, the issue costs would be paid out of available cash reserves.( Then they extra financed more amount for issue costs). How can I interpret the sentence? (the issue costs would be paid out of available cash reserves) Thank you very much
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