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Hello…
with regards to calculating the dividend capacity….is it ok if we take (operating profits less tax add non cash items less capex and then less interest) or it should be (operating profits less interest less tax…etc)can anyone please help me…am confused abt it
What you say is OK – it does not matter what order you subtract and add things (as long as you remember that interest is allowable for tax if you are having to calculate the tax).
Here is a question about “interest is allowable for tax if you are having to calculate the tax”.
In the Appendix 3 of provided answers for Question 1 of December 2015 paper, when calculating the cash flows for years 1 to 4, the tax figures (which are 597, 627, 658, 691) seem not taking into account interest.
Is the answer wrong?
The answer is not wrong!
This question is not asking you to calculate the dividend capacity (or the free cash flow to equity) which is what the previous question on this page was referring to.
This question is wanting you to discount the cash flows at the WACC as usual. When are discount cash flows at the WACC we never ever take interest into account in the cash flows (or the tax saving on the interest). Discounting at the WACC is accounting for the interest and so to include it in the cash flows would be accounting for it twice!
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