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Hi John, I hope you have this question since it’s a pretty old one, it is in kaplan kit anyways.
I want to know firstly that why have we excluded inflation completely in this question’s calculations? Neither we have inflated cashflows nor we have adjusted discount factor!
Secondly in the model answer they have calculated the tax on operating profit minus overheada but have excluded depreciation, isn’t tax calculated on taxable income and that should be in this case operating profit minus depreciation & overheads?
Thanks.
Why do you say that they have excluded inflation completely?
Overheads have not been inflated because the question says that they are expected to stay constant. Textiles revenue has not been inflated because the question says so. However the other revenues have been inflated each year.
With regard to the depreciation, the question specifically says that ‘group charges relate to depreciation which is not tax allowable’.
Yes cashflows are increased but aren’t they increased by growth rate rather rate of inflation? I mean the 4% inflation rate is not useds but just given growth rates are used?
Had the question said something like ‘the level of sales is expected to increase by X%. and that there was inflation of Y%, then you would need to take both factors into account.
However, it actually says that the profit is expected to increase by X% and so this will have already taken into account any expected inflation.
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