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1. for tax allowable depreciation (TAD) calculation, why do we deduct all the working capital and issue cost ? why can’t we add both and calculate TAD based on 5.4 million ?
question says that issue cost are not tax allowable but i assume this is irrelevant for TAD calculation.
2. for debt portion, they got 2.7million by multiplying 0.5 with 5.4 million but shouldn’t it be (5.4 – working capital portion – equity issue cost ) x 0.5 ?
Since working capital portion and equity issue cost are irrelevant to debt portion amount ?
3. for NPV calculation in the APV, can i use 50%debt 50% equity to get ungeared cost of equity ? i really do not understand why they use 60% 40% to get the
4. for TAD, usually we deduct TAD and then calculate the tax portion after that add the TAD. However ,in this case since they have already provided us the “operating cash flow” figures, so we assume they have added the TAD. Therefore we simply calculate tax and then add the TAD amount ?
1. TAD is only ever available on non-current assets!!! You don’t have depreciation on working capital.
2. No. They need 5.4M and 50% of it is coming from debt. It is irrelevant what they are spending the 5.4M on – if they need it then they must raise it.
3. It is the gearing of the company that matters, not how the particular investment is financed.
4. Depreciation reduces the taxable profit and therefore saves tax.
I explain how to deal with this in my free lectures.It really does seem as though you are not watching my lectures, and you really cannot expect me to type them out here 🙂
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