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This topic contains 4 replies, has 2 voices, and was last updated by furgus 2 months ago.

- AuthorPosts
- July 4, 2018 at 8:05 am
Hi, please will you explain why the tax figure in Ch10, example 6 is calculated as 935 x 20% = 187 and not (935 – 170) x 20% = 153.

Thanks

July 6, 2018 at 4:15 pmHi,

I suppose the 935 should be the profit before tax and not operating profit in order to make it correct.

Thanks

July 21, 2018 at 12:50 amI’ve found a pdf on the CIMA website – Company valuations and free cash flow for students of F3.pdf

which explains how to deduct tax in each case

When calculating Free cash flow to all investors you

Deduct Tax (excluding tax relief on interest) (PBIT x tax rate)which is what you have in the solution (apologies for questioning this previously)

When calculating Free cash flow to equity you

Deduct Tax for the year (PBIT – interest) x tax rateI think maybe the tax saving on interest should be added after the Free cash flow to all investors line, in a sense that you can’t have a tax saving on interest until you’ve deducted the interest. I’ve put the two calculations below so it’s clear. I think it must be in there somewhere because of the different way each free cash flow calculation deals with the tax deduction. Does this make sense?

$000s

Profit before interest and tax (operating profit) 935

Less: Tax (20% x (935-170)) (153)

Add: Depreciation (non-cash) 120

Less: Investment in non-current assets (420)

Less: Investment in working capital (185)

Less: Interest (170)

——–

FREE CASH FLOW TO EQUITY 127

——–$000s

Profit before interest and tax (operating profit) 935

Less: Tax (20% x 935) (187)

Add: Depreciation (non-cash) 120

Less: Investment in non-current assets (420)

Less: Investment in working capital (185)

——–

FREE CASH FLOW TO ALL INVESTORS 263

Less: Interest (170)

Add: tax saving on interest (20% x 170) 34

——–

FREE CASH FLOW TO EQUITY 127

——–July 21, 2018 at 12:53 amI tried to lay the calculations out clearly but it deleted my spacing so it’s not at all clear. I hope you can see what I was trying to do.

July 21, 2018 at 1:38 amI’m starting to doubt my understanding again. This looks like the free cash flow to debt holders is interest less tax on that interest (at the business rate of tax) which seems odd. If you don’t put the 34 there where else would you put it?

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