I would like to know why I get 2 different answer through NI approach and EBIT approach
EBIT : 28.1
Interest: (4.2)
EBT: 23.9
Net Income: 12.5
WCInv: 5.2
FCInv: 8.1
Depr: 12
Tax rate: 45%
Repament of debt: 8
(from Kaplan Book 2 Mock Exam 2 Q101)
The answer use NI approach: NI + Depr - WCInv - FCInv + Net borrowing = 12.5+12 - 5.2 - 8.1 - 8 =3.2
I use EBIT approach: EBIT(1-T) + Depr - WCInv - FCInv + Net borrowing - Interest(1-T) = 28.1(0.55) + 12 - 5.2 - 8.1 - 8 - 4.2(0.55) = 3.8
How come I get 2 different Answer? Is it because of the tax rate? Which approach I should use in exam ! Help Thx!!!
Your EBT of 23.9 doesn’t align with NI of 12.5 given the 45% tax rate. (23.9)(1-.45) = 13.145. Numbers probably got mixed up somewhere.
Yes, I know that the tax rate is not consistent, maybe due to deferred tax item? If the inconsistence is due to deferred tax items, isn’t it included in the net working capital already ? Which approach should be use then?
Sorry, I don’t have the Schweser mocks to refer to, but if you were given that table, I would assume it was an error by the test writer or one of those trick questions just to make it seem tough. I would think the only time you might see a table like this might be in residual income where they ask about clean surplus accounting violations. Even a calculation on that seems unlikely; I wouldn’t put too much effort into this one.
But even in CFA official mock exam, it has question like this too [NI not equal EBT*(1-T)]
EBITDA
275
Depreciation expense
82.5
Operating income
192.5
Interest expense
16
Income before taxes
176.5
Income taxes
- 5
Net income
120
Additional, CapEx = 165.3 and WCInv = -1.8 and Net borrowing = 12.5
For its answer, it use EBIT(1-T) approach and the FCFE calculated is 0.92
So, basically, the 2 different approach will result in different answers when NI not equal EBT*(1-T). But which one should we use in the exam?