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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?
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.