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Ok, its breakeven. Got it. But if there was a loss, examiner will mention in scenario how to adjust it right?
Thanks 🙂Hello, in this question, in year 1 there is a tax loss off $12.2m, but there is no mention as to whether the loss can be set off against other operations, as it is a multinational. and if we do set off the loss, tax benefit will be for the additional tax of 10% or 30%, or should we set off against future profits from subsidiary’s operations only?
Why is that so? If the cost of capital related to a project is given and the project’s Cash flows are being swapped, then why not the project’s cost of capital?
Ok, got it now. You made it very clear. Thanks
In the same question of MJ2019, why the profit on the machinery isn’t taxed, when machinery is sold at a profit at the end?
35m
Tax dep @ 15% 5.25m for 4 yrs
at year 4 it is sold for 7m.The MIRR, like IRR, is biased towards projects with short payback periods, didn’t got this point. MIRR is consistent with NPV, then how it can be biased?
Thanks 🙂Also, can you explain why Gamma is +ve when Theta is -ve for option holders, especially for put option holders, as they have a -ve correlation with the value of underlying asset?
Although the loan is for 3 years, we don’t need to hold options for that duration because what we’re actually hedging is the fluctuation of interest rate from now to the date we’ll take out the loan like after 4 months. So why we need to keep selling and reinvesting, when can just adjust the number of option contracts for the longer duration of loan??
I didn’t got your second point clearly.
Also why it says there’ll be counter party risk in both cases? As they’ll enter into a swap or loan agreement with their own subsidiaries?Exactly, I thought the same. But there is a question fubuki co dec 2010 where examiner has taken issue costs on subsidised loan as well, wonder why?
Thanks for your assistance.Yes, Fly4000. Its a december 2006 question. As you mentioned about proceeds from sale of JV & repayment of a loan are one off & thus are not included in FCFE, but in the answer, tax is also excluded which is not a one off cash flow.
Hello John,
What about taxation, its not a one off cash flow, then why is it ignored?
Secondly, the reinvestment of 120.2m would also be generating a return for shareholders in future so should be a part of FCFE?Thankyou so much John, with your help, I’m able to get things which I never understood previously. God bless you 🙂
So the conclusion I reached, that entering into swap may not be beneficial for Casasophia, considering the current inflation rate estimates, would also be correct?
One more question, that the way we calculate acquiree’s gain will also affect acquirer’s gain, as the same assumption (about transfer of post acquisition value through share exchange) would apply, affecting the amount of synergy gains allocated to aquirer, resulting in a different % gain for acquirer also. Am I correct in my understanding?
Thanks alot 🙂Then how will we know from whose point of view, we have to calculate, as it is not clear in the question. Also, why in case of a complete share for share exchange, post acquisition gains are considered for calculating acqiree’s gain, in the same question, but in case of a mixed offer (cash & shares) they are completely ignored. Will both answers be acceptable?
I have another question, in case of free cash flows for equity, it is mentioned in book that interest payments redemption values of debt are deducted & then the cash flows are discounted using cost of equity. What is meant by the redemption value here, it is the nominal value at which the debt will be redeemed not the market value, am I right?
Yes, I got it, those are APV questions. Can you please tell me in which situations we value a target company using APV method rather than NPV? Is it only when the acquisition is being financed by debt (acquirer raises new debt finance) or there are other reasons as well, because in a book example, a target company is valued using APV method, but there is no mention of the acquisition being financed by debt. The tax savings are calculated on the existing debt of the target company.
I thought APV is only used, when new debt finance is raised & hence capital structure changes, but in the example, tax savings are calculated on the existing debt of target company, how can an existing debt change the capital structure of the company?In the second case that you mentioned, will we discount cash flows after interest using geared or ungeared cost of equity, to get the value of equity?
Because in some questions, even when the company is geared, its value is calculated by discounting at the ungeared cost of equity.
