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Hello John,
Ennea: please how did they calculate the current asset for proposal 1,Share Capital for proposal 1 and lastly retain earnings?Tramont Co: please how ddo they calculate opportunity cost? It says unit x contribution x (1-tax) (still didn’t get it)
Ennea:
Since the current share price is $3.20, they will buy back $20M / 3.20 = 6.25M shares.
Therefore the share capital will reduce by 6.25M x $0.40 (nominal value) = $2.5M, and retained earnings will reduce by the balance of $17.5M.
Retained earnings will also reduce as a result of the extra interest payable.
Current assets will also reduce by the amount of the extra interest payable.Tramont:
The question tells you in the third paragraph that they are currently making a contribution of $20. At the moment they are expected to sell 40,000 next year, 40,000 – 20% the year after, and another 20% lower the year after.
These sales (and therefore the contribution from them after-tax) will be lost if they produce in Gamala.Thank you so much sir. I feel I’m ready (I hope) .
Please sir, I know we are not to add depreciation to NPV, however some questions ask for depreciation of plant &machiney on a reduce basic(taxable profit ) We subtract the depreciation from profit then tax it
However some ask depreciate plant & machinery on. Straight line method and the solution is subtracting depreciation first and adding it back.Please how do I know which to use.
It doesn’t make any difference whether you calculate the tax saving on allowances separately, or if instead you subtract from the profit, then calculate the tax and then add back the allowances.
(If you are still unsure, then it will help you to watch the Paper F9 lectures on investment appraisal with tax).
Hi John,
In Ennea company, proposal 3, how is the interest saved of $1432000 calculated?
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