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Hi Tutor,
Kindly explain further the maximum premium calculated based on the excess earnings method.
I don’t quite understand why the examiner multiplied the tax rate by the average capital employed and then deduct it from the average pre-tax earnings. Please clarify.
Thank you.
The examiner has not multiplied the tax rate by the average capital employed.
He has multiplied by the bio-technology industry’s return on capital employed (as per the instructions in the question), which also happens to be 20% 🙂
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