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Hi Tutor,
Again, this is taken from Q1 December 2013. Chmura Co.
“The corporation tax in Megham (overseas country) is 25%. The corporation tax of the country where Chmura Co is based is 20%. Tax is payable in th year it arises. A bi-lateral tax treaty exists between the two countries which permits offset of overseas tax against any tax liabilities Chmura co incurs on overseas earnings.”
I would have thought the answer would go like this. (Year 1 example only)
Overseas taxable profit (MP million) = 3.8
Tax (25%) = (1.0)Therefore, as Chmura Co has paid 5% more than they would in their domestic country, Chmura Co is owed a tax credit of 5% as follows.
3.8 x 5% = 0.19 MP millions = 190,000 MP
Exch rate: 76.24MP: $1Tax Credit in $ = 190,000/76.24 = $2,492
However, I noticed that in the solutions there was no line for tax credit. The principle I used above always applies where the domestic country has a higher tax rate than the overseas country. Does it not apply when the tax rate of the domestic country is lower?
Thanks again.
Tobi.Hi
Please advice how answer 18.6 % came acca p4Ordinary shares, par value $1 600 Retained earnings 22,400 10% loan notes1,000 7% preference shares, par value $1 1,000
The current ex div ordinary share price is $5 per share. An ordinary dividend of 80 cents per share has just been paid. The dividend paid 2 years ago was 70 cents
The current ex div preference share price is 90 cents.
The loan notes are redeemable at par in 3 years’ time. They have a current ex interest market price of $95 per $100 loan note.
Tax is 30%.
Calculate the current weighted average cost of capital
The correct answer is
18.6%
Trebleo: This is a standard tax rule. If the tax in the home country is higher than they just pay the extra tax. However it the tax in the home country is lower, they do not get a tax refund or credit.
(Incidentally, I have uploaded lectures working through the whole of this question – you can find them linked from the main P4 page following ‘Revision Kit Live’.)
Brain: In future you must start a new thread when you are asking about a different topic – your question has absolutely nothing to do with the question Chmura or tax credits in NPV!!
The question you have asked is basic Paper F9! You calculate the cost of equity by calculating the rate of past growth p.a., and then using the dividend valuation formula from the formula sheet.
The cost of the preference shares is simply 7/90.
To get the cost of the debt you need to calculate the IRR of the after tax flows.Once you have calculated the cost of each of the three sources of finance, you take the weighted average by weighting by the total market value of each of the three sources,
All of this is explain in detail, with examples, in my free lectures (and if necessary the F9 lectures since this is revision of F9) – you cannot expect me to type out all of my lectures here 🙂
@johnmoffat said:
Trebleo: This is a standard tax rule. If the tax in the home country is higher than they just pay the extra tax. However it the tax in the home country is lower, they do not get a tax refund or credit.(Incidentally, I have uploaded lectures working through the whole of this question – you can find them linked from the main P4 page following ‘Revision Kit Live’.)
Thanks John!
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