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heyy john
part (B)
1))
Cash ($3,289m + $400m – $1,200m – $1,050m) 1,439
3,829 is payable to management
400 is vco investment
1200 is the asset purchased
what is 1050 ???and i am not happy with this
2))
Depreciation (12% x 20% x ($7,500m + $5,400m)) (310)
because i didnot take in my calculation which should have nil effect
adding back and then deducting hence nil effect but examiner belowSales revenue (20% x $16,800m) 3,360
Operating costs (25% x 10,080m) (2,520)
Profit before depreciation, interest and tax 840
Depreciation (12% x 20% x ($7,500m + $5,400m)) (310)
Profit after depreciation,before interest and tax 530
Tax (18% x $530m) (95)
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Cash flows 435
––––––1. It is repayment of ‘other debt’
2. We need to deduct depreciation in order to calculate the tax. Although the depreciation is not a cash flow, it is not added back because (as usual) the question says ‘the annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation’. (I do explain the relevant of this in my free lectures)
Hi John,
I have a doubt regarding this question, its mentioned the annual reinvestment needed to keep the operation at their current level is equivalent to tax allowable depreciation.I understood this point but in the above paragraph its mentioned that company will invest 1200 m into equipment for its mining and shipping unit. Should we deduct this from free cash flow as it is an additional investment.
Thanks in advance!!Hi Sir,
I have on more doubt regarding this problem.When the produce the financial position after restructuring the mention total Non current asset as 6000 and 5520,why they are not deducting the depreciation? one more doubt regarding MBO, after finding the value of manufacturing business unit why are they not deducting the payable portion of manufacturing unit which is 20% of 750? Please clarify.Thanking you in advance!!
The SOFP is immediately after the restructuring takes place. More depreciation will only be relevant in later years.
The value of the MBO based on the cash flows does give the ‘net’ value of the. business. i.e. assets less current liabilities.
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