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The question is Tramont Co 2012,
Q1)
Here after converting the cash flows into $ why aren’t we discounting at the rate of 7%, coz in the question they say IF Gamalan project is undertaken, COC applicable to the cash flows in the USA is expected to be 7%.
But in the marking scheme they have calculated using CAPM formula why is that??Before starting the calculations first we have to do the workings for where the project is going to take place ryt? then using exchange rate convert it into the home is it the standard way?
q2) For taxation workings can we do like this do a separate working for tax- including tax allowable depreciation minus that then taxble profits * tax rate and the final figure to be included into the workings or it depends on the question how u arrive at the tax figure?
1. There are two reasons.
One is that the question asks you to take an APV approach (i.e. discounting at the all-equity rate), so we need the cost of equity as if it were all equity financed, whereas 7% is the overall cost of capital.
Secondly, we need to discount at the all-equity rate applicable to the riskiness of the Gamala project, which has an all equity beta that is 0.4 more that the all equity beta of Tramont.And yes – you calculate the cash flows in the currency of the country where the investment is, and then convert the new cash flows for the remittances to the currency of the home country.
2. What you say about the tax is fine 🙂
Thnks for the reply, my queries had the answer inside them, needed an expert to clarify it 🙂
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