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In this question, the amount of funding needed has not been grossed up for the issue costs, and thus, the issue costs have also been calculated on the net funding required. Why is this so?
Ennea co (6/12)
In this question, tax has not been calculated on the profit of $2m on the sale of the non current assets. Why, sir?
Trosoft:
Note (b) of the question says that all other year 0 outlays will be financed from existing cash flows. The loan would only need grossing up if the question had said that the issue costs were to be paid out of the money raised.
Ennea:
The examiner has actually written in his answer (in italics) the following:
“The profit from the sale of the assets for proposal 3, of $2,000,000, is assumed to be after tax. Answers which consider the profit to be before tax, and therefore only take into account $1,600,000 as the net profit, will receive full credit.”
Oh oops. I never knew that the note meant that the issue costs need not be grossed up! Thanks sir.
Oh alright. So basically, p4 is full of assumptions. So as long as I state what my assumptions are (unless we’ve clearly been told what to do in the question), I will be given full credit, right sir? 🙂
Also sir, even in Strayer (6/02), the issue costs have not been calculated on the gross amt of finance, and no such note (as in the case of trosoft) has been included. So will I be given full marks if I compute the issue costs on the gross amount of the loan?
Many thanks!! 😀
You are correct in saying that P4 is full of assumptions (as it would be in real life as well).
The P4 markers are good and understand the topic, and so always state your assumptions – provided they are not ridiculous, you will still get the marks (assuming, of course, that you do things correctly based on the assumptions that you have stated 🙂 ).
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