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Why did we calculate issue cost by using 4% on $31 875k ($30 600k/0.96), instead of 4% on $30 600k?
Because the question says “issue costs of 4% of the gross finance would be payable” and also “issue costs would be paid out of available cash reserves”
I thought if the question did say to use cash reserves, then we should not gross it up to include the issue costs to calculate amount finance to be raised? Because we do not need to borrow ‘extra funds’ to compensate the issue cost?
The wording is ambiguous and if you calculated as 4% of 30,600 then you would still have got the marks.
https://opentuition.com/topic/tippletine-co-mar-jun-2018/
Hi sir, I was confused with the issue cost too.
Eg. $30.6m is needed for the project, issue cost 4% on gross finance, interest cost 2.2%
Just to clarify, if the question states that the ISSUE COST WILL BE ON GROSS FINANCE, the issue cost will be paid out of CASH RESERVES AVAILABLE, what we USUALLY do is the issue cost will be
$30.6m*2%= $0.612m.And the Tax shield on interest will be ($30.6m*2.2%), as we only borrowed $30.6m.
Thank you sir in advance
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Taking AFM MJ 2021 paper Robson Co as example,
” Issue costs of 2% are payable on gross external financing and are not allowable for corporation tax. Issue costs are payable out of available cash reserves. ”The issue cost in the answer is ( Rights issue10, subsidised loan 40, bank loan 50) =$100m
$100m*2%=$2m.so, issue cost paid out of cash available= %*amt needed
if not mentioned, assume borrow the issue cost too, ie issue cost= (amt needed gross up to include issue cost)*%Is the above correct? (and Tippletine is an exception)
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