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- May 12, 2020 at 6:04 am
Debt: ($30,600,000/0.96) = $31,875,000
Debt issue costs: $31,875,000 *0.04 = $1,275,000
I 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.May 12, 2020 at 6:30 am
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 🙂May 12, 2020 at 9:55 am
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 muchMay 12, 2020 at 2:11 pm
You could actually interpret it more than one way and so as always in AFM you should state your assumptions – there is rarely just one correct answer in AFM because it depends on your assumptions.
The examiner has interpreted it as being out of the cash that was raised.
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