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In Working 7 the taxable profit taken for additional tax from working 5 is profit after tax allowable depreciation(e.g 38,470), why is that? Shouldn’t the tax allowable depreciation should be nullified before taking it for additional tax.
Any additional tax should always be calculated on the taxable profit (which is after tax allowable depreciation).
The tax in the foreign country was calculated as 20% of the taxable profit, and the extra tax in the home country is an extra 10% of the taxable profit.
How about GTG Kit question no 27(Partsea) (a), the remitted amount has nullified the tax allowable depreciation in the NPV computation before taking it for additional tax. I think other questions has also done the same.
I do not have the GTG books and so I do not know what they have done.
However, what the examiner has done in question 1 of his Pilot Paper is completely correct. Tax in both countries is calculated on the taxable profit, which is the profit after subtracting capital allowances. That is the normal tax rule, and the tax rule in Paper F6, and is the rule that the examiner has applied in his pilot paper.
SIr, can you explain me the effects of high gearing for a company in context of market reaction and also how does market contagion and reserve currencies influence exchange rates .
Good heavens – that is a big question 🙂
I will answer, but this can only be relevant in the exam for written parts of questions – not for calculation parts.
First, high gearing. For the numbers, high levels of gearing mean more risk for shareholders – therefore higher equity beta, therefore higher cost of equity.
However, when profits are increasing (the economic climate is ‘good’) then high gearing is attractive because the interest payable stays fixed and there can be bigger increases in the amount available for shareholder. The market will react favourably.
But……if the economic climate is ‘bad’ then the market will react unfavourably because if profits fall, but there is still high interest payable, then shareholders will suffer more.With regard to market contagion, a good example is the Euro at present. If one country has a problem – e.g. Greece – then on its own there is no reason that it should particularly damage the Euro. Greece is only a small part of the Euro countries. However, contagion is when people feel that the problem will spread. As a result, people felt that the problem in Greece would spread to other countries in Europe and so the Euro suffered – even before there was any effect on other countries.
As a result, one relatively small problem can end up having a big effect – this is what is meant by contagion.With regard to reserve currencies, there is no longer any ‘official’ reserve currency, although the dollar is currently the major one – it is a reserve currency in that many countries hold a lot of their money in dollars. (The second biggest is the Euro – many countries hold a lot of their money in Euros).
The affect of a country holding much of their money in dollars, is that they are not affected by exchange rate movements for transactions in dollars. As a result there tends to be more stability of exchange rates.At the moment, many countries (especially Russia) are pushing for there to be an ‘artificial’ reserve currency created. If every country held their money in one currency then exchange rates would be almost irrelevant and we would have stability.
Hope that all of that helps 🙂
Thank you for explanation.
If a company acquires another company what will happen to the debt portion of the acquired company.
It depends what the question says – either the debt will be taken over by the acquiring company, or the debt will be repaid.
Usually the debt will be taken over by the acquiring company. (If the question does not say, then state your assumption.)(1+i)=(1+r)(1+h)
the above relationship applies in all economies and can be extrapolated to mean that the interest rate differentials in the long term equate to inflation rate differentials over the same period.Sir, what does the above statement means?
In theory, interest rates and inflation rates go up and down together (in the long term), and therefore as one changes so too will the other (i.e. the differentials).
2011 dec (Q) 4 b
At the end of question it has stated that tyche company will repay 3m of the outstanding loan at the end of the next 5 yr from the cash flows generated from its business activity, but i dont think it has deducted from its cash flow generated in the ans.Both interest and repayment of borrowing are not included in the cash flows. The reason is that they are effectively taken account of by the discounting at the WACC.
june 2011 (Q) 1a
in determining the cost of capital of fodder , it has used the interest rate 9%(coupon) as cost of debt .Is it correct to do that and cant we use FCFE for the valuation instead.
I am away from home until Wednesday and I cannot access the question.
I will reply on Wednesday when I am home.Sir , does the share price reflect only equity portion or does it reflect debt portion too.If it does then how should we know and how does it effect in acquisition.
My previous question is pending too .
For Fodder, the answer has not used the coupon rate.
The question says that they anticipate paying 9% on future borrowings – this is not necessarily the same as the coupon rate (they could be issuing debt at $90 with a coupon rate of 8.1%, for example).I may have misunderstood your second question, but the share price is only reflecting the shares i.e. the equity.
NOTE: please do not ask questions on different topics under the same thread. The reason is that we give answers for the benefit of everyone. If it is a new question, then please start a new topic. Thanks.
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