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Dear Sir,
Value of spinning off department B
$m
PBDIT (40% X 37.40) 14.96
-) attirbutable to department C ( 10% X 14.96) (1.50)
-) tax allowable depreciation (98.2 X 40% X 10%) (3.93)
PBIT 9.53
-) tax @ 20% (1.91)
FCF 7.62a.Why the depreciation of $10.1m not included in the calculation?
b.Why the tax allowable depreciation is not added back after tax?FCF $7.62m
Present value of year 1 $7.62m X 120% X 0.909 = $8.31m
Present value of year 2 onwards $9.14m X (1+5.2%)/(10%-5.2%) x 0.909= $ 182.11Why use $9.14m and not $8.31m instead?
Thanks.
Question1:
It is because note (vi) of the question says that it is to be assumed that the amount needed to maintain operations is the same as the tax allowable depreciation. (So although you would add back the depreciation you would then subtract the amount needed to maintain operations – so the net effect is to do nothing 🙂 )
Your second question:
You could use 8.31 instead, but then you would not need to multiply by 0.909 again in arriving at the present value of year 2 onwards. It would give exactly the same answer.
value of spinning off department B
$m
PBDIT (40% X 37.40) 14.96
-) attirbutable to department C ( 10% X 14.96) =(1.50)
-) tax allowable depreciation (98.2 X 40% X 10%) =(3.93)
PBIT 9.53
-) tax @ 20% =(1.91)
FCF 7.62my question is why TAD was deducted before calculating tax. i thought it should be deducted after tax
Tax allowable depreciation is always allowable for tax.
You either subtract the TAD, then calculate the tax, then add back the TAD because it is not a cash flow.
Or, alternatively, you calculate the tax on the profit before TAD and then calculate separately the tax saving on the TAD’s.I do explain the two alternatives in my free lectures (and in the F9 lectures as well because it is revision of F9)
Hello, Sir,
My question is why not subtract the interest of 7% unsecured bond to calculate FCFE, Like according to the formula ,FCFE=FCFF-Intrest(1-t)+net borrowing. The examiner answers say FCF , than he uses growth model to calculate value for company and subtracts debt to calculate FCFE.
Thank-you
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