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Right, Sir.
Thank you for your help. It is beginning to make sense now.Will this always be the situation with an option to expand?
How is this different from an option to delay? I have not come across a similar treatment for an option to delay. Take the case for Digunder in Dec 2007 (option to delay), for example.
I cannot seem to reconcile the two for consistency.
Kind regards
Thanks so much, Sir.
It would have been so much clearer for the examiner to just say it as you put it that, working capital is needed at the start of each year. What it meant was that one would have to understand those two sentences as meaning simply what you said.
Thank you once again
Regards
Right. I guess I am thinking out of line with this part.
Thank you so much for making it more clearer.
Regards
Dear John,
Thank you for getting back to me.
I guess all I am driving at is to find out why amortised cost would be wrong.
How different is this debt from one that I should have to amortise?
If I could think of it in such a simple manner like the examiner did with this debt it would be great.
Kind Regards
Dear John,
I continue to express my appreciation for yur time.Regarding the sensitivity bit, I am comfortable with working out the percentage change once I get the $ amount. I am struglling with the increases in the variables especially construction costs.
At first I presumed construction costs would increase by 300, 600 , and 100 for year 1, 2 3 respectively. Once I find the present values of these amounts I can then work out the percentage change.
The present value of these amounts is 843.4. The % sensitivity is 122.2/843.4 = 14.4%. The model answer is the same as this. But what is the amount in Dollars?
In like manner sensivitty for the operating surplus would be 122.2/1059.7 = 11.53%. But then again I am struggling to make sense of the $ cash flow involved.
same with decommissioning costs
I see the answers try to use the discount factors to find the $ amounts but like i said, i am struggling to understand the logic there.
Kind Regards
SamSorry about this, that this is not in one piece.
The part (a) (iii) on sensitivity, to this question is troubling me: Please help
Kind regards
Thank you for your time.
My concern is this:
In part a(i)
we want the net benefit to pursuit and its shareholders-we are asked to use the free cash flow to firm method.what comes to mind immediately is to find the total value (equity+debt) of each company using the free cash flow to firm method. we do same for the combined company.
Now, because we are interested in the benefit to shareholders, we extract the equity values from the total market values calculated above, and we go ahead to find the net benefit for shareholders by doing the following:
1. equity value of combined – (equity of pursuit + equity of fodder)
The answer follows this process but used total market values (debt +equity) in formula 1 above.
This is my worry. Why is that?
Kind regards
Alright, that makes sense now.
But will it be the same workings where tax is paid say a year in arrears? That is where the subsidy benefit is received earlier than the tax relief on interest (as tax payment is lagged by 1 year). The BPP text book mentions this but it is not clear. Is it even worth looking at these from this angle at all? Or is it just okay to assume again that the tax benefit and subsidy benefit are all received at the same time?
Regards
Ooh Dear!!!
Thank you so much. Such a relief!
Thanks again.
But it is such a big ask to spot these in an exam situation.
Dear John,
Thanks again for your time and support.
I am talking about net off because of the below reply you gave to a participant in the past.the participant wanted to know why the tax allowable depreciation was deducted in calculating taxable profits, but not added back to free cash flow. You explained that the investment was equal to the depreciation, so there is no point in adding and subtracting the same figure twice.
The answer deducts TAD in arriving at taxable profits, then deducts tax to arrive at free cash flow. I expected to see TAD added back to free cash flows, but this was not the case.
In your first reply you said the TAD was not deducted to arrive at the cash flows. That is the case in the question, but not so in the answer.So is it not the case that if we did not have to add back the TAD (though it was deducted initially in the answer to calculate taxable profits and subsequently free cash flows), then there is no cancelling effect between the investment required and TAD to warrant us ignoring them completely from the answer? It would seem that TAD would have been added back to free cash flow if not for the assumption of equality with the investment required.
Kind regards
.November 30, 2014 at 11:18 am
avatar
lzyjzy
Participant
When estimating FCFF for division B spinoff, depreciation is deducted from FCF to arrive at taxable profits. But depreciation is not added back subsequently even though it is not a cash flow – doesn’t this underestimate Vogel’s CF by the tax allowable depreciation amount?
Thanks!
.
| Quote Reply November 30, 2014 at 3:21 pmProfile photo of John Moffat
John Moffat
Keymaster
It is because the amount needed to maintain the assets (which is a cash flow) is assumed to be the same as the depreciation figure.
Dear John,
Thank you for your reply. However, I am still a bit unclear.
Basically the confusion surrounds the treatment of these three:Depreciation
Tax Allowable Depreciation(TAD)
Investment-Capital Exp.For the purpose of calculating taxable profit, and therefore, tax (a cash flow), I understand the TAD will be subtracted from profits.
If we are unable to add back TAD to after tax profits, It is difficult to see the net-off with the CAPEX.
In that case which item has been netted-off with the CAPEX, because in the answer the CAPEX did not form part of the calculation of free cash flows.
Kind regards
Samson
