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John Moffat.
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Ron123
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Hi, for sample answer part (c), under the “value created from spinning off Department B into Nedge Co”, the PBIT attributable to Department C is deducted from the current share of PBDIT of Department B. Is this because the PBIT attributable to Department C is the profit from intracompany transactions, and hence, it must be eliminated, since profit is only recognized/realized when the profit is from external entities?
Thank you.
John Moffat
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No. The accounting treatment is of no relevance to the financial manager. It is the free cash flows that we are concerned with.
The cash flow from department B is 40% of the PBDIT, but since 10% of this comes from Department C then this will no longer be received.
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