Hello! Why didn't we use the mortgage payment into account? Also the essay said that it is after-tax operating income not after-tax NET income so why did we consider it after-tax NET income? usually the rule is After-tax net cash flow is Net income + depreciation expense or it is after-tax operating income + depreciation tax shield.
we don't get the right answer because $1.2m is after tax operating income, it's not the after tax cash flows. We add depreciation tax shield on the after tax cash flows not on net income.
Sir , In ques (c) why did we add Net income + depreciation we use to directly add the depreciation tax shield to the after tax income right? and as 1200000 is given after tax then why did we add only the depreciation?
Unless the question clearly states that "taxes effects take place at the year end" then your assumption is right. Advertisement expense is a valid tax deductible expense so will be taken on after tax basis, even it is being paid now, and that's why in the Question 1 we have taken it as 50,000 x ( 1 - tax rate).
Hello! Why didn't we use the mortgage payment into account? Also the essay said that it is after-tax operating income not after-tax NET income so why did we consider it after-tax NET income? usually the rule is After-tax net cash flow is Net income + depreciation expense or it is after-tax operating income + depreciation tax shield.
Mortgage payments are not required to be treated separately when After tax profit is given. Moreover, after tax operating profit is net profit here.
New project hurdle rate as per CAPM MODEL 40% Right ?
Because market risk premium means Rm-Rf . 10%+2*15%=40%
awesome lecture! just loved it ;)
Sir in Q2 why we don't add 61250 the tax shield to 1200000 and the resul would be the answer?
we don't get the right answer because $1.2m is after tax operating income, it's not the after tax cash flows. We add depreciation tax shield on the after tax cash flows not on net income.
Sir , In ques (c) why did we add Net income + depreciation we use to directly add the depreciation tax shield to the after tax income right? and as 1200000 is given after tax then why did we add only the depreciation?
There are two ways to do it.
Cashflow = Net Income + Depreciation Expense
Cash flow = After tax cash flow + Depreciation Tax Shield
Hi..I saw your explanation for Advertising expenses as legitimate expenses...but tax will attract only after yr one right? Correct me if I am wrong
Unless the question clearly states that "taxes effects take place at the year end" then your assumption is right.
Advertisement expense is a valid tax deductible expense so will be taken on after tax basis, even it is being paid now, and that's why in the Question 1 we have taken it as 50,000 x ( 1 - tax rate).
Whats the reason for calculating taxshield on advertising expenses
Because it expense and it will reduce operating profit