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Dear John,
1) Why we dont have to calculate the balancing allowance/ balancing charge for the capital allowance?
2) Is it because Thrillall’s risk and financial structure is close to Sleepon Hotels so we use a risk-adjusted WACC? If the financial structure is different, then we will have to use adjusted present value method, please correct me if am wrong.
Also, since Thrillall’s risk and financial structure is close to Sleepon Hotels, can we just use Thrillall’s WACC for Sleepon Hotels?
3) If no other information is given besides the tax rate, then we pay tax when taxable income is a positive figure and receive money when taxable income is a negative figure?
1. The question says that the realisable value is after tax.
2. Yes. We use APV when there is a big change in the structure (although almost always the examiner specifically says if he wants an APV approach).
3. Correct.
Thank you for ur reply John,
1) I still dont understand, why when the realisable value is after tax we dont need to calculate the balancing allowance/ balancing charge?
2) I understand the first part of my question. Thank you. However, you forget to answer the second part of my question.
3) Thank you, I understand now. 🙂
1. If it is after tax, then presumably it is after all tax effects including any balancing charge or allowance. It is of course an assumption, but question 1 in the exam always depends on assumptions, which is why you are always asked to state your assumptions. If you assume differently then you still get the marks.
2. No – you cannot use Thrillall’s WACC. The capital structure may be similar, but it is different and therefore you are expected to calculate the relevant WACC.
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