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Hi tutor, I have a question_Vogel Co (Jun 14).
Question: Note (vi): “claim 10% tax allowable depreciation on its non?current assets. It can be assumed that the amount of tax allowable depreciation is the same as the investment needed to maintain Ndege Co’s operations”.
I think that the tax allowable depreciation should be plus rather than less and its position should be under tax. Please, explain why the answer has deducted the tax allowable depreciation.
Thanks tutor a lot
I explain this in my free lectures because it is something that the examiner write in most investment appraisal questions. Have you watched the lectures?
Although the TAD is not a cash flow (and therefore if it has been subtracted to calculate the tax, it would then we added back), there is the same amount spent on maintaining the assets and this is a cash flow. So there is no need to add it back.
Hi John / Tutor, In this question it says that Ndedge (Department B) will retain the 7 unsecured bond.
Why is this not included in the valuation for T0 free cashflow.I am using the free cashflow to the firm approach to value department B
I adjusted PBITD to $13.46m
I have included the TAD of $3.93mThe solution dose not include a finance cost of $2.8m (Interest on the bond of 7% by $40m) to arrive at the PBT why is that?
Thanks,
AdamWhen using the free cash flow model we take the cash flow available to all investors (equity and debt) and discount at the WACC. The interest (and the tax saving on the interest) is accounting for in the calculation of the WACC.
Have you watched my free lectures on this?
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