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part(a)
1)-investment in working capital [15% of (20/120 × $80m)]
why divided by 120 , it is an increase of 20% from previous year
it should be divided by 100 and multiply by 120 right??2)-how the mangnloia variable cost $2.4 arrive ?
3)-whenever i see the dividend capacity question i start with free cashflow to equity method and hence arriving at wrong figures , can i do that for an exam , also the interest as per the free cashflow to equity is dedcuted at last which is different then dividend capacity calculation in answer.
EBIT X
Less: Taxation (X)
Add: Depreciation X
Operating cash flow X
Less: Amounts needed to replace non-current assets (X)
(unless told otherwise, assume that this is equal to the level of depreciation)
Less: Any additional non-current asset expenditure (X)
Less: Incremental working capital expenditure (X)
Free cash flow X
Less: debit interest and repayments (X)
Add: cash raised from debt issues X
Free cash flow to equity X1. Yes. It increases by 20% so it is 120% of this years revenue, and the working capital is15% of the increase of 20/120 of this years revenue.
2. The cost of assembling them is 300,000 units x $8 per unit
3. You will have to say which bit of the answer you are not clear about, and then I will explain. You cannot simply learn a layout – if you understand why the figures are there then the answer should make sense.
3)-
under free cashflow to equity method , which i have learnt from your lectures.Operating profit (30% of $80m) 24.00
Less tax (28%) (6.72)
Profit after tax 17.28
Less investment in working capital [15% of (20/120 × $80m)] (2.00)
Less investment in non-current assets [25% of (20/120 × $80m)] (3.33)
Less investment in new project (4.50)
Free Cash flow from domestic activities 7.45
Overseas subsidiaries dividend remittances (W1) 3.16
Less tax paid on Magnolia’s profits [(28 – 22)% of $5.40m] (0.32)
Less interest (8% of $35m) (2.80)
Dividend capacity 7.49Under Bbp , the calculation have done like this
Operating profit (30% of $80m) 24.00
Less interest (8% of $35m) (2.80)
Profit before tax 21.20
Less tax (28%) (5.94)
Profit after tax 15.26
Less investment in working capital [15% of (20/120 × $80m)] (2.00)
Less investment in non-current assets [25% of (20/120 × $80m)] (3.33)
Less investment in new project (4.50)
Cash flow from domestic activities 5.43
Overseas subsidiaries dividend remittances (W1) 3.16
Less tax paid on Magnolia’s profits [(28 – 22)% of $5.40m] (0.32)
Dividend capacity 8.27difference 8.27-7.49=0.72
Why on earth are you asking me, when all you need to do is tick off your figures against the answer – then it should be obvious to you where your mistake is !!!!!
Interest is allowable for tax and so your tax figure is wrong. Interest is always allowable for tax – not just in AFM but in every one of the earlier exams from Paper F3 onwards.
(and 8.27 – 7.49 certainly does not equal 0.72 !)
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