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Hello
In the question, Could you please explain how the tax value on the income statement shows 1.8 when the rate is of 25% and the taxable income on the statement (PBIT 24 – interest of 5 = 19). I would expect 25% of 19= 4.75But maybe more importantly, when adjusting PBIT for advertising costs, depreciation, economic depreciation etc, why do we not calculate the tax implication on those adjustment. I would expect to apply 25% ( lets say) on the adjusted PBIT, but we do not, we keep the same tax amount but adjust it with the tax benefit of the interest only…why?
Many thnka for your help
In EVA calculations the tax paid (where given) is used as the tax charge. This is subtracted from the adjusted operating profit after tax (NOPAT) to calculate the EVA. It is important to consider the actual cash payment of taxes made by the company in the current year rather than the tax figure from the profit and loss statement. By using the tax paid, EVA takes into account the actual impact of taxes on the company’s financial performance. Whereas advertising might be treated as capital expenditure rather than revenue for NOPAT, no such reclassification or adjustment is available for tax. Tax paid, however calculated, is cash gone as a fact of life.
thank you for coming back to me.
I understand, tax will inevitably have to be paid however given we are reversing the expenses back onto the income statement, would it not be more accurate and in line with providing more transparency in maximising shareholder weatlh if we were to account for the tax charge over those elements or better yet, reversing the tax benefit from the intial expense hit in the P/L?
Arent we then overstating our NOPAT or understating our tax.
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