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Hello Sir,
Could you please explain working 3 for calculating de geared cost of equity
I’m not familiar with this method and it looks a bit confusing,(Apologies in advance for excessive future questions that may come as I work my way through the kit as I’m completely self studying and sometimes getting completely stuck)
Got it, it was the MM model 2
For the subsidy benefit and tax relief calculation
I’m not clear on why did we multiply investment with (.05-.022) and then with 3.546
Same goes for tax relief lostKind regards
The question says that the normal cost of borrowing is 5%.
The subsidised loan is at 30 basis points below the risk free rate of 2.5% and therefore the interest payable is 2.2%.
Therefore the subsidy benefit is 5% – 2.2%.
They get the subsidy for 4 years and so is is multiplied by the 4 year annuity factor for 4 years at 5%.
The workings for the tax relief are the same except the relief is 1 year in arrears and so is discounted for years 2 to 5 (so the discount factor is 4.329 – 0.952).
Hi sir,
Can you please explain why 4.329 (for five years) is used and not 3.546 (for four years)? Shouldn’t it consist of annuity from 2-5 (4 years) and not five years?
Thank you in advance.
Regards,
JelenaI assume that you are referring to the tax shield on the debt raised, in which case it is the annuity for 2 to 5 as you state.
However that is what the examiner has done in is answer – he has calculate the 2 – 5 annuity factor as the 1 to 5 factor less the 1 year factor.
Hi Sir, Can I add the tax relief of 30% of the tax allowable depreciation (30.6m x 25% x 30%) to the operating profit instead of deducting (30.6m x 25%) from the operating profit?
No you cannot (and the answer has not deducted 30.6m x 25% in any one year anyway).
The TAD as always needs to be calculate for each year (just as in Paper FM). However they do not get any benefit of it in the first two years because there are tax losses and the losses are carried forward to set off against profits in future years (as directed in the question).
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