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Sir why have we deducted TAX on operating CASH FLOW, when trying to value the sportswear company?
When calculating the free cash flow to the firm we always calculate tax on the cash flow before tax and interest.
It is because the interest and the tax saving on it are dealt with in the calculation of the cost of debt and therefore in the WACC at which we discount.
To include them in the cash flows would be accounting for them twice.
Sir I have done plethora of questions from the exam kit so far, and nowhere did I ever see a sum calculating tax on operating cash flow. It has always been on operating profits(in cases where WACC was available and had to find FCF to firm).
I certainly feel there is some sort of blip, because its really an exception.
Operating cash flows are arrived at after deducting the tax from operating profits(and making other changes as adding back depreciation etc.). So, then why in this question have they deducted tax from Operating Cash flow, is basically my question.
The operating profit is the profit before tax and interest.
The operating cash flow is the operating profit as adjusted for non-cash items such as depreciation.
The tax is calculated on the operating cash flow after subtracting capital allowances, but there is no mention of capital allowances here and so they are irrelevant.
so operating c/f are operating profits + depri? so in the q if there is any depri we will not add it back to the operating c/f for finding FCF?
Correct. The cash flow is already before subtracting the depreciation (because depreciation is not a cash flow).
but for taxation purpose cant we add it back to find PBIT and find the taxation then deduct it from operating c/f ( if depreciation was given in q)
No. Tax is calculated on the taxable profit which is the operating cash flow less the tax allowable depreciation.
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