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1. usually of taxable profit is negative, isn’t tax supposed to be 0 ????
2. When we get the exchange rate and when it takes into account of the inflation rate, why can’t we simply multiply with 4.8% ? not 1.048/1.025
Because in the calculation of variable cost, fixed cost and sales revenue, amount in the answer sheet have already taken into account of 2.5%.
Therefore shouldn’t we multiply with 4.8% ???
3. This may be a general knowledge question but, when we get the interest rate to discount net present value, is it nominal interest rate ? or real interest rate ?
4. when we get the share price Pa, shouldn’t we deduct the divdient payment during the operation period ?
Because Pa represents the present value of future cashflow and managers are entitled to receive divdend as well as market priced(610) shares1. Since the company already exists, we always assume that it is currently making profits and paying tax. Therefore a ‘loss’ on one new project reduces the existing profit and therefore saves tax. If you are still unclear then watch the Paper FM lectures on tax, because this is revision of the earlier exam.
2&3 We multiply by 2.5% to calculate the nominal/actual cash flows. We then discount by the nominal/actual cost of capital, which is calculated using the Fisher formula.
Do watch my free lectures on dealing with inflation.4. I don’t know which question you are looking at, but there is no option pricing in the actual exam question.
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