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I am struggling to understand this:
Free cashflow is calculated as:
EBIT(1-Tax Rate) + Depreciation & Amortization – Change in Net Working Capital – Capital Expenditure.As far as i knew, EBIT include depreciation. So that EBIT( 1- tax rate) means u deduct depreciation (1-tax rate) (eg : 0.7* depreciation) . But we add the whole depreciation. So where does 0.3* depreciation go?
Tks in advance for helping me out!
Suppose the profit before depreciation was 200 and the depreciation is 50 (so EBIT = 150).
If there were no tax, the cash flow would be 200 (or EBIT of 150 + depreciation of 50).
If there is now tax of 30%, then there is the additional cash flow of the tax payment. The tax payable is 30% x 150 = 45 (because the depreciation is tax allowable).
Therefore the net cash flow = 200 – 45 = 155.
This is the same as (150 x 70%) + 50.
Thank you so much! So 0.3* depreciation = depreciation allowed for tax
You really relieve my headache
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IS THERE ANY LECTURES AVAILABLE FOR BUSINESS VALUATION ACCA P4
Please do not write in capital letters, and please do start a new thread when it is a new topic.
There is no lecture because there are no additional techniques required other than those covered in all of the earlier lectures.
The problem is more one of approach and for that reason I have uploaded lectures working through a few recent Question 1’s where in addition to working through the technical parts of the questions I also discuss the approach.
You can find them linked from the main P4 page as “P4 Revision and past questions”- Topics: 2
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Many thanks
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