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Dear john,
hope you are fine. In tramont for the US cflows there is a contribution per unit of 4 on each unit sold in the foreign country…well one thg that is not clear, it says somewhere sellg price is not subject to inflation and only cost in respective inflation rates are subject..i get that but why did they inflate that contribution /unit of $4 ..please clarify me on that..when i worked i didnt do it because i didnt see any place of contribution suject to inflation ratesIt is an assumption (and the examiner should really has stated it as one of his assumptions).
However, there is a logic to the assumption. Most companies would wish to increase their selling prices as their costs increased, but it is not always possible (because of competition etc..) So certainly in Gamala they are not increasing the SP (because the question says so). However Tramont selling to Gamala is a bit different because they can happily put up their price 🙂
Again, though, it is an assumption.Hi Sir,
Regarding part a I do not understand that how the additional contribution figures are calculated for year 1-4 as it is given in working 7 .
Thanks in advanceJust over half way down the first page of the question, it says that Tramont is supplying a component to Gamala that gives them a contribution of $4 per unit. We know the number of units a year, we know the rate of inflation, and we take 70% of the total to account for the tax at 30%.
The question says that you should discount at an appropriate all-equity rate (i.e. he wants an APV approach).
The cost of equity if all equity is determined by the asset beta of the project. The question says that this is 0.4 more than the current all equity financed beta.
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