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When finding the combined value of Vogel + department A they have used the earnings of 18.4 x .5= 9.2 as the PAT for department A.
My question is, after the unbundling they have stated that the bond would be transferred. So there wouldnt be interesst to pay for department A. So shouldnt we use the
PAT 18.7(PBT) – 4.04 (deprecitation) = 14.03 as the PAT of department A?Sorry I meant
18.7———PBT of department A
(4.04)——— depreciation to Department A
——–
14.66
(2.932) ———Tax
———
11.73 ——PATShouldnt we use 11.73 as the earnings of department A when calculating the combined value of Vogel + department A. Why are they taking the interest also into account if it will be transferred away?
I agree with you – I think your answer is more correct 🙂
(Although given the the bond is $40M and the coupon rate is 7%, then the interest on the bond would be $2.8M, which means there must be other borrowing and there some of the interest would still remain!).
Assuming you did everything else correctly, I think you would get full marks.
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