ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values
Orion plc needs net funds of $9.5 million for a project and will raise them through a rights issue. Issue costs are 5% of the gross amount raised. Ignore tax relief on issue costs. What are the issue costs, in $?
Issue costs are $500,000. Because costs are a percentage of the gross amount, the gross issue must be $9.5m divided by 0.95, which is $10m, and 5% of that is $500,000. Applying 5% to the net figure would be the wrong base.
- A$475,000
- B$500,000Correct
- C$450,000
- D$525,000
Explanation
Net funds required are 95% of gross, so gross = 9,500,000 / 0.95 = 10,000,000. Issue costs = 5% x 10,000,000 = 500,000. The $475,000 figure wrongly applies 5% to the net amount.
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