[jayped]

thank you, sir

[jayped]

Hi Sir,

Why was tax allowable depreciation not added back in the free cash flow to firm calculation of Fodder Co?

[jayped]

Thank you, sir. That helps and makes complete sense.

[jayped]

Hi, which revision kit do you speak of?

[jayped]

March/June 2016 paper Question 4 not Sep/Dec Sorry

[jayped]

Thank you, sir! I can now liken it to example one of chapter 16 but instead of valuing the firm based on cash flows we are valuing based on dividends.

[jayped]

Okay, I realise the small over-hedge is (125,000 x 185) – 23,121,387 = $3,613. But how do I show the calculation to correct?

Thanks,

[jayped]

“The transfer price is not relevant – it is income to A but a cost to B.”
So essentially the two cancel each other out. The $165 is income to A and a cost to B. Without division A, the income of A no longer exists which means the cost to B will no longer exist ($165).
So, (my way of looking at it is this):
Since there’s no more division A, that means theres no marginal cost of $100
total marginal cost = $100 * 2200 = $220,000 (a saving)
No fixed cost any longer = $10000 (a saving)

BUT B is now buying 2200 units from Cold Co at $140
Total cost = $140 * 2200 = $308,000 (a cost)
Difference :
308,000 – 220,000 – 10,000 = $78,000

Hope this helps

[Author]

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