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Hi tutor,
In Activity 1 – dividend capacity, Chapter 1 of AFM BPP Kit, why are we adding 60 along with the 40 million ?
I assume that you are referring to the Study Text rather than the Revision Kit?
I only have the Revision Kit.
The following projected financial data relates to CX Co.
$m
Operating profit 400
Depreciation 60
Finance charges paid 30
Preference dividends paid 15
Tax paid 75
Ordinary dividends paid 60
The book value of CX’s non-current assets last year were $200 million. This is projected to rise by
$40 million.
CX Co is planning to repay $100 million of debt during the next year.
Required
Estimate and comment on the dividend capacity of CX Co.the answer is
Profits after interest and tax (400 – 30 – 75) 295
Less preference dividends (15)
Add back depreciation 60
Less capital expenditure
(Closing non-current assets higher by 40 + depreciation 60 = capital expenditure
of 100)
(100)
Less debt repaid
Dividend capacity 140
The ordinary dividend of $60 million is below this, which indicates that the dividend could
potentially be increased.my question is why are we adding depreciation 60 once again along with 40 while we have already done that add back. wont it be double counting ? whats the reason behind this ?
If the book value (which is after depreciation) rises by 40M, then the actual expenditure must have increased by 40 + 60 = 100M
Hello Tutor,
I was totally confused with this question as well. So whenever we read “the book value” we should know that the question means “the net book value” the one after deducting the depreciation?
I perceived “the book value” as gross book value before depreciation and couldn’t understand the answer in the book until I read your answer above. Thank you in advance!
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