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for appendix 1
1. shouldn’t interest paid be deducted after free cash flow ? according to opentuition notes, it says that interest will be paid after calculating freecash flow2. in the calculation for working capital and additional non current assets, how did they get 8% ? i’m not sure where they got this 8%
3. why is the formula for the calculation of dividend capacity is different from the notes of opentuition ? because they the formula for dividend capacity in LIRIO CO, i was not able to find it in opentuition notes
4. shouldn’t we suppose to deduct depreciation(25million) from operating profit ???since depreciation should not be charged to tax ?
5. for the futures contract calculation in appendix 2, when they calculate 0.8650, how do we calculate 0.8650 using spot or forward rates ??
1. The question asks for the dividend capacity, so interest needs subtracting. The interest reduces the taxable profit and therefore reduces the tax charge. Otherwise, where you subtract it in the table doesn’t matter.
2. The question says that revenue is growing at 8%. Given that it also says that the working capital and additional investment are per $ increase in revenue, then they are increasing at 8% as well.
3. There is no formula for dividend capacity and none is stated in our notes. It is an accounting term more than a financial management term, and is the cash available for dividends.
4. Note 2 of the question says that depreciation has already been charged in arriving at the operating profit – we therefore do not subtract it again.
5. You can calculate it as the lock-in rate in the way explained in my lectures.
i really appreciate your help John !
just for the number 4, shouldn’t we suppose to disregard depreciation when we calculate the tax amount ?
because when we see in the formula for the opentuition notes page 80, depreciation is added after EBIT has been taxed, therefore shouldn’t we suppose to deduct depreciation from operating profit ? (and deduct after operating profit has been taxed)
i really appreciate your help John !
just for the number 4, shouldn’t we suppose to disregard depreciation when we calculate the tax amount ?
because when we see in the formula for the opentuition notes page 80, depreciation is added after EBIT has been taxed, therefore shouldn’t we suppose to deduct depreciation from operating profit ? (and deduct after operating profit has been taxed)
Also in question 5
if i use the lock-in rate isn’t it
0.8656 + {( (1/1.1618) – 0.8656) x 1/3 } = 0.8640 which is different from the answer…Profit is calculated on the profit after subtracting tax allowable depreciation. The depreciation is added back afterwards because it is not a cash flow.
It does not need adding back here because of note 2 in the question (investment is needed that is equivalent to the amount of depreciation).
With regard to the lock-in rate, the relevant spot rate to use is 1.1585 (we are selling euros and buying dollars) and the unexpired basis is 1/4, not 1/3 (June futures expire in 4 months time and the transaction is in 3 months time), and finally the lock-in rate must always be between the current spot and current futures price, so we need to subtract and not add.
1/1.1585 = 0.8632
(0.8656 – 0.8632) x 1/4 = 0.0006
0.8656 – 0.0006 = 0.8650
@johnmoffat said:
1. The question asks for the dividend capacity, so interest needs subtracting. The interest reduces the taxable profit and therefore reduces the tax charge. Otherwise, where you subtract it in the table doesn’t matter.Search regarding this, the answer deducts interest prior to taxation. I deducted tax prior to deducting the interest, which obviously led to a different answer. Kindly assist
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