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In case of calculating dividend capacity firstly why have they not added back depreciation expense and what does it mean it have been included in the operating profit
Second how investment in additional assets calculated ?
The question says “the investment required to keep the non-current asset base at its present productive capacity in 20X6 will be $2,430m, which has been included in the calculation of operating profit as depreciation”.
As I stress in my free lectures (because this is something the current examiner is almost always stating) this means we do not add back depreciation because there is a cash outflow of the same amount. Have you actually watched all of the lectures?
The investment in addition assets is stated in the question as being 25% of the additional revenue. The operating profit is to increase by 3% and given that we know the profit margin is 2% then the new revenue is the increased profit divided by 2%. The increase is the new revenue less the current revenue.
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