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HI John
I have some question at JUNE 14
1. FRO Q1. during the recording, we calculated the locking rate directly by using closing basis plus the future rate. I want to can we calculate the conversion date ‘s spot rate by using PPPT? also in the question, I do not understand meaning of this sentence: inflation in USA is three times higher than the SW. IF WE ASSUME inflation in Sw is 1, how about the inflation is USA? is 3 or 4?
2.for Q3, I know when calculate free cash flow to firm, we should start from EBIT, deduct the tax, and then add depreciation, why the examiner deduct the depreciation? also what’s useful for this sentence in the question “It can be assumed that the amount if tax allowable depreciation is the same as the investment needed to maintain Ndege Co’s operation?
3. for Q2. For this sentence” No tax allowable depreciation is available on the remaining investment assets and they will have a nil value at the end of the project.” because this sentence, so we do not consider the balancing charges in the question?
thanks John1. It is not ‘locking’ rate – it is ‘lock-in’ rate 🙂
You cannot calculate the future spot rate using PPP for two reasons. One if that it is only ever a forecast and the actual rate could be completely different. The other is that we would need the actual inflation rates ( one being 3 times the other is not enough to be able to use the formula). If swiss inflation were 1% then US inflation would be 3%2. We would usually add back the depreciation because it is not a cash flow. However, the examiner is assuming that there is an equal amount needed to maintain operations, and this is a cash flow. So no need to add back and then subtract the same amount.
3 Yes – you are correct.
For your answers for the second Q. So if I do not inderstand this meaning, and process the depreciation regularly. Could examiner apply penalty for me?
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