March/June LaForge Q2 (B) (i) & (ii)

GGraham5y ago

Hi John In this question the examiner has asked to calculate the revised EPS & SP, but the second last line of the scenario states that 'profit from operations will increase by $4.5m'. I would have increased this figure by the $4.5m and then calculated my tax on it (whether it was with the rights issue of the loan notes as this will have interest to be deducted) but the examiners solution has taken the PAT amount as per the scenario and only applied tax to the $4.5m increase but surely the tax amount will be different if the increase is in profit from operations. Very confused!! Please help Thanks very much Graham

John MoffatTutor5y ago#1

In future please do state which exam the questions come from - I cannot remember the name of every question that has ever been asked :-) Although the company pays tax at 20%, the current profit after tax of 16.56M is not 80% of the current profit from operations. I do not know why that is the case - the most likely reason is that the company already has some long-term borrowings and is currently paying interest, because the profit after tax is always after interest and tax. Whatever the reason, on the information given the profit after tax will be the current 16.56 plus 80% of the extra profit less any extra interest.

GGraham5y ago#2

Hi John, Apologies for not providing the full details, it was March/June LaForge 2020 Q2 (B) (i) & (ii) I'm still unsure on this. The scenario stated the 'profit from operations will increase by 20%' if the finance was raised. If profit increases then the tax on those profits will be higher but they've just added 20% to the current PAT figure which will be different if they chose debt finance due to the interest being charge on the bonds. Sorry, maybe I'm being stupid here but I don't see their logic. Thanks Graham

John MoffatTutor5y ago#3

No, they have not done what you have written. They have taken 20% of the operating profit (4.50) subtracted the extra interest (1.53) and then multiplied the result by (1 - 0.2) to account for the extra tax at 20% on the extra profit after interest.

GGraham5y ago#4

Ah ok! Thanks John

John MoffatTutor5y ago#5

You are welcome :-)

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