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Hello John.
I did watched all the lectures, but have become slightly confused after going through a lot of questions (because of slight differences in each question’s instructions that effect the approach/method).
1. TAD
where depreciation is tax allowable, we add it to the pre-tax figure, then tax it (i.e. calculate and deduct the tax from that total), then we add the same TAD again to this same post-tax total.
is this correct?2. Interest Rate Swap (Keshi Co, Dec 14)
“The bank offers Keshi Co a swap on a counterparty variable rate of LIBOR plus 30 basis points or a fixed rate of 4.6%, where Kashi Co receives 70% of any benefits accruing from the swap, before bank charges. The bank charge to Keshi is 10 basis points for the swap.
(Keshi’s situation without the swap: libor+0.4% floating rate or 5.5% fixed rate)”ok. i understand the differential between fixed rates is 5.5-4.6= 0.9
and between the floating rates is 0.4-0.3= 0.1
so the total differential is 0.9-0.1= 0.8
0.8 is the benefit that will be shared. via the above arrangment Keshi Co will get 70% of 0.8, so 0.7 x 0.8 =0.56, minus 10 points for the bank fee= 0.46 in actual terms.where do I go from here? I cannot follow the logic of the answers in the revision kit:
Keshi borrows at LIBOR+ 0.4%
from swap Keshi receives LIBOR (why just LIBOR alone?)
Keshi pays 4.54% (where does this figure come from?)
Keshi’s effective borrowing rate (after swap): 5.04% (how???)1. TAD
What you have written is not correct.
We subtract (not add) TAD to calculate the taxable profit, and the tax payable.
In Paper FM, we would then add back the TAD because it is not a cash flow.
However, as I stress in my lectures, the current examiner always assumes (and usually states in the question) that an amount equal to the TAD is needed to maintain the assets, and in this case we do not add back the TAD.2. Keshi
You will find an explanation here:
Hi John.
Thank you for your response and help.
1. I accept what you say about the current examiner, but just to double check with you, this is what confused me in the first place:
https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/international-project-appraisal—part-2.html(see specifically: Appendix 1 – NPV and Workings)
^it is a technical article from the ACCA AFM section. shall I assume that this is an old article and so what you stated now applies?
2. thank you for the link.
It is an old article (and is not written by the examiner).
However because the question did not specifically state that an amount equal to the TAD is needed to be spent maintaining the assets, you will still get the marks if you did add back the TAD.
As I wrote in my previous reply, and as I state in my lectures, the current examiner usually does have that statement in the question (and even when he does not, he assumes it in his answers, which is why it is important always to state your assumptions in Paper AFM – there is rarely just one correct answer because it depends on assumptions).
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