Issue Costs:
3/97 x $80m = $2.5m
Tax shield:
Annual interest payable = $80m x 0.03 x 0.2 = $0.5m
Are not we supposed to use the gross amount 82.5m while calculating the interest payable? I have seen a number of questions where the interest is calculated on net amount.
am i missing something?
thankyou
Zhichi SD 2021
3y ago#1You are correct, and doing that would have got full marks :-)
3y ago#2Just to clarify further, I add an extract from this question:
"Issue costs, which need to be paid, are anticipated to be 3% of the gross finance. Issue costs are not allowable as a tax-deductible expense".
The examiner's answer for issue costs is 3/97 x $80m = $2.5m (without rounding 2.474$m).
Is it one and the same, if I gross up the financing and calculate the issue costs in the following way: 3% x 1.03 x $80m = 2.472$m?
3y ago#3Yes, it is the same.
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