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1. in the wokring 5 calculating local variable cost, when we look at the year 3, i’m not sure how 60,664 somehow just became 38470…..
2. we include the working capital increases or decrease in the cashflow but i do not understand the reason why all the cashflow deducted will be added at the final year….
3. in this case, when taxable profit is negative, taxation amount will be 0 while in BLIPTON INTERNATIONAL (08 ADAPTED), when the negative taxable profit is shown, taxation amount will be added.
is it because if the question states that “both countries’ corporation taxes are payable in the year that the tax liability arises”, then when negative taxable profit is shown, then we put 0 while if that sentence is not shown, then we added the taxation amount to the negative taxable profit ?
4. in calculating market value of debt, the answer have multiplied 40million with 1428/1000 but how do we know 40 million is the amount shown in the financial position ??
5. in the calculation of NPV in APV, we are required to calculate ungeared cost of equity for discounting cashflows however, in this question they allowed both WACC and ungeared cost of equity. Does it mean that both WACC and ungeared cost of equity is acceptable to discount cashflow in NPV in APV or only this question is allowed for that calculation.
1. Working 5 has nothing to do with variable costs – it is the workings for the tax.
The profit is 60,664 but there are losses brought forward of 22,194, which reduces the taxable profit to 38,4702. We always assume that working capital is recovered at the end of the project – it is not longer needed. I cover this in my free lectures.
3. Blipton is a company that already exists and is already paying tax. This question is setting up a new company in another country and therefore there are no existing profits. Again, I explain this in my lectures.
4. When a question says ‘$40M 7% bonds’ then it always means that the nominal/par value is $40M (and this is what would appear in the SOFP). This is basic financial accounts from earlier exams.
5. This question certainly does not allow both WACC and unguarded cost of equity. With APV we always discount at the ungeared cost of equity (and then deal with the benefit of the tax shield).
It seems that you are trying to study for AFM simply by working through questions and asking me to explain. That is not the way to pass this exam. You must study first – either by watching all my free lectures, or by working through a Study Text. You cannot expect me to effectively keep typing out parts of my lectures like this – we do not give private tuition.
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