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Dear John,
As shown in the answers (Appendix 1), while computing the FCF, the TAD is not taken into consideration when calculating the tax. The tax is calculated by taking multiplying the PBIT with the tax rate.
The usual way I do it is to minus the TAD before computing the tax and add the TAD back later. So why in this case the TAD is not taken into consideration?
Also, the TAD is added up with other non-cash expenses totaling up to $1,206,000. Is there any way to identify the exact amount of the TAD? Or is it because the TAD cannot be identify so it is not taken into consideration while computing the tax?
Because we are calculating the free cash flow to the firm, we want the cash flows before interest.
The TAD has been taken into consideration because the tax has been calculated on the PBIT, and the question says that in arriving at the profit after tax they have deducted TAD and other non-cash expenses. If they had been deducted in arriving at the profit after tax then they had obviously been deducted in arriving at the profit before tax 🙂
All non-cash expenses (including TAD) are added back, and so we don’t need to know how much of it is TAD.
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