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ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values

Brandt plc has a project with a base-case NPV of $0.90m. The project needs net funds of $6.0m, which will come from a new equity issue. Issue costs are 4% of the gross amount raised, and no tax relief is available on them. What is the project's APV after allowing for issue costs?

The APV is $0.65m. To receive $6.0m net after 4% issue costs, the company must raise $6.25m gross, so the costs are $0.25m. Deducting them from the base-case NPV of $0.90m gives $0.65m. Applying 4% to the net amount understates the costs.

  1. A$0.660m
  2. B$0.900m
  3. C$0.650mCorrect
  4. D$1.150m

Explanation

To net $6.0m after 4% costs, the gross issue is 6.0 / 0.96 = $6.25m, so the issue costs are $0.25m. APV = 0.90 - 0.25 = $0.65m. Taking 4% of the net $6.0m gives $0.24m and APV of $0.66m, which applies the percentage to the wrong base. Ignoring the costs gives $0.90m, and adding them gives $1.15m.

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