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CT2 April 2014

S

skhurana

Member
Hi ,

What do you all think of the exam especially Q19?
 
Q19

Q19 was an interesting question. I think they have not asked many amortisation questions in the past (if any). I was expecting a question for preparing financial and income statements or ratios question. I think the question was odd.

Q20 I had the feeling that it is a CT1 question.
 
it was alright wasn't it? You just needed to use all the formula to recacluate share price under the new depreciation scheme... then write about why it wouldn't be the calculated price in real life.
 
Q19

I think so. That's what I did. I hope my calculations are correct. I assumed that the tax rate is 0% and I think it was a mistake :(
 
h.hasanov said:
I think so. That's what I did. I hope my calculations are correct. I assumed that the tax rate is 0% and I think it was a mistake :(
Click to expand...

You couldn't work out the tax rate, but you could work out the absolute amount of tax they paid before the new depreciation scheme.

I assumed tax didn't change for the new calculation
 
Nicholas.Campbell said:
You couldn't work out the tax rate, but you could work out the absolute amount of tax they paid before the new depreciation scheme.

I assumed tax didn't change for the new calculation
Click to expand...

I thought you could. The amount deducted from earnings before tax to arrive at earnings available to ordinary shareholders was the same percentage of EBT for each of the two years given (around 16.9% if I remember right).
 
Calcium said:
I thought you could. The amount deducted from earnings before tax to arrive at earnings available to ordinary shareholders was the same percentage of EBT for each of the two years given (around 16.9% if I remember right).
Click to expand...

But bear in mind, whatever the rate, the taxable amount isn't applied to direct to EBT.

Taxable amount =
ordinary profit
+ deprciation
- capital allowances
+ non-taxable expenses
- reliefs

I guess you could assume non taxable expenses and reliefs are zero, but you'd need to assume capital allowances were the same as before. Maybe that's reasoable, but I figured just assume tax was the same - maybe I'm wrong lol
 
Nicholas.Campbell said:
But bear in mind, whatever the rate, the taxable amount isn't applied to direct to EBT.

Taxable amount =
ordinary profit
+ deprciation
- capital allowances
+ non-taxable expenses
- reliefs

I guess you could assume non taxable expenses and reliefs are zero, but you'd need to assume capital allowances were the same as before. Maybe that's reasoable, but I figured just assume tax was the same - maybe I'm wrong lol
Click to expand...

That's a fair point, it just seemed too coincidental that it was identical year on year, unless that was a deliberate red herring.

In any case, I thought the tax liability that a company uses when calculating profit for ordinary shareholders for the purposes of reporting was an estimate anyway, which they may simply take as a straight percentage of EBT.

On another note, I took the approach of assuming the P/E ratio remained as before reporting -- I assume this is what other people did?
 
Calcium said:
That's a fair point, it just seemed too coincidental that it was identical year on year, unless that was a deliberate red herring.

In any case, I thought the tax liability that a company uses when calculating profit for ordinary shareholders for the purposes of reporting was an estimate anyway, which they may simply take as a straight percentage of EBT.

On another note, I took the approach of assuming the P/E ratio remained as before reporting -- I assume this is what other people did?
Click to expand...

Yup, I agree with you on that one - I think that's all you could do. Then in the next part, explain it was wrong..
 
Nicholas.Campbell said:
Yup, I agree with you on that one - I think that's all you could do. Then in the next part, explain it was wrong..
Click to expand...

I also agree that you could not calculate the tax rate but only the tax amount. Also, i assumed the PE Ratio remained the same. I therefore had as part of my assumptions that, i) the tax amount remained the same and ii) the PE Ratio remained constant.
 
I did what Calcium did - tax @ 16.9%. I did not keep P/E constant, but tried something else. Now, I think keeping P/E constant is what they were looking for.

I made a remark in my answer that this question didn't make sense: The share price is basically something investors believe of what future dividends will be like. There is no formula for that. You can't simply keep P/E constant; P/E follows from the price, not the other way around.

For the rest, I think the 5 point questions were definitely doable.

I found question 20 difficult; a lot of points clustered on only a few things to mention.

Could go either way for me I think.
 
I took the absolute tax amount..I don't know if that's right or wrong.. Even I took a constant PE.. As far as the last question goes, I was a little confused if working capital was to be kept aside in the third year or no because the provision was to be made at end of year and after year 3 they were going to close the business.. I've made a note of it in my answer though.... And what did u guys answer about how to use certainty equivalents????
 
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