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Dear sir, may i know how to get the figure of 96M and 84M for forecast after tax earnings?
1) interest saved due to lower borrowing
(‘96M’mil x 6.2% x 0.8)2) reduction in earnings due to lower investment (9% x ‘84mil’)
1)
The question says they will pay off 80% of the debt. So they will pay off 80% x $120M = $96M.
Therefore they will save the interest on $96M at 6.2%. But they will not be saving the tax of 20% on the interest no longer paid, and so the net saving will be $96M x 6.2% x 0.8.2)
Under ‘other financial information’, the question says that they will suffer a 9% decrease in after-tax earnings on any reduction in investment in non-current assets. The non-current assets are currently $280M but they will reduce by 30%, so a reduction of 30% x $280M = $84M.
Therefore the after-tax earnings will reduce by 9% x $84M.
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