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Hello sir,
when calculating dividend capacity in Requirement (b), why is the answer in BPP ignore the information of ‘The current depreciation charge already included in the operating profit margin…’? I added back $50m*25%
In contrast, in March/June 2018, Q3 Arthuro Co, the answer provided added back $30m depreciation.
Just got confused of these answers.
THX in advance.
For Lirio, it is because of note 2 in the question – an investment equal to the depreciation is needed to keep the current productive capacity. So although depreciation is not a cash flow and is therefore added back, there is a cash outflow of the same amount – so no point in adding back and then subtracting the same amount.
This is a common thing in questions set by the current examiner, and for that reason I explain it in my free lectures.
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