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Dear Sir
Q1 shows Foshoro most recent SPL and shows tax paid 22.7
Please explain how the examiner arrives at his/her tax figure in the answers supplied
It goes against all the text books i have read
Regards
He has taken 20% of the operating profit each year.
It is the profit before interest because in NPV calculations we never bring in interest or the tax saved on interest (because they are accounted for in the calculation of the cost of capital).
The operating profit is after tax allowable depreciation. The depreciation is not a cash flow, but has not been added back because the question says that there will be expenditure of the same amount to maintain the current level of operations.I don’t know which text books you have read, but both of these are standard practice for AFM (P4) and I deal with both of them in my free lectures on investment appraisal.
Ok, we never bring in tax on the interest…..I thought tax was tax, you pay what the taxman tells you to???? If the P or L says you paid 22.7 tax then that is it????
of course, you are right. So when calculating a NPV and they give you a tax figure do not use it???
It depends on actually what tax figure they are giving you, but you certainly don’t automatically take the tax figure in the SOPL when there is interest in the SOPL.
Right, but if like in q3 Arthuron where they want dividend capacity which is FCF to equity then of course the tax on interest must be taken into account??
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