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regarding the dividend capacity, the formula states that capital expenditure should be accounted for and the question has this paragraph : “An investment equivalent to the amount of depreciation to keep its non-current asset base at the present
productive capacity” . Is this a capital expense as it is being netted off with the depreciation therefore depreciation is not added back.
i remember capital expenditure being the one which enhances the value of the asset over its useful life but this is just to maintain the current capacity so must be a revenue expense.
thankful for your help with the lectures anyways 🙂Yes (to the first bit of your answer) 🙂
Usually we would add back the depreciation but since there is an outflow equal to the amount of the depreciation we do not need to.
(The current examiner always assumes this in his answers, even if it is not actually written in the question).It doesn’t matter whether the new expenditure is capital or revenue – if there is a cash outflow then it is relevant. However whatever it is, we assume that it is not already included in the other cash flows.
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