Q/A Session!

Question 1: Good Morning sir! Aftertax salvage value = s+( bv-s) tax% ... is this formula right?

Answer: According to the book, Aftertax Salvage Value = S.V. - (S.V. - B.V.)*Tax%. But your formula would also work as that is a derived form of the same formula.

Question 2: Can you please clarify us about the final exam syllabus again?

Answer: According to the decisions made centrally by the FIN254 coordination committee, final exam must be comprehensive covering the whole syllabus.

Multiple Choice Questions may be from anywhere, not necessarily from our book as different faculty members use different books in their sections. But as everyone follows same set of topics, you don't need to worry if you cover the things discussed in the class.

As far as problems are concerned I will prepare them considering all the chapters we covered in class. For convenience I am making it simplified - for 100% final exam portion, no problems beyond chapter-10, there will definitely be a large problem from chapter-10, one problem from chapter-8 on stocks, some problems covering time value of money concept and financial statement analysis.

Question 3: Sir, you mentioned about Pretax OCF in the class. If I want to calculate OCF, then I have to deduct taxes from the pretax OCF. Is my concept right, sir? Is pretax OCF same as pretax cost savings?

Answer: You are right! Tax is applied on earnings, not on cash flows. Since we disregard interest expense when evaluating a project, OCF = Net Income + Dep. Exp. = (EBIT - Taxes) + Dep. Exp. So, OCF + Taxes (which is Pretax OCF) = EBIT + Dep. Exp. Now you calculate taxes on EBIT, then deduct taxes from pretax OCF to get OCF.

Yes, in the text books, "pretax OCF", "pretax cost savings", and "savings in pretax operating costs" all have same equivalent meanings. That means, pretax OCF = pretax cost savings = savings in pretax operating costs = OCF + Tax = EBIT + Dep. Exp. = Sales - Costs (excluding non-cash exp). So, whatever following formula you apply, you would end up with the same OCF.
Formula 1 => OCF = EBIT + Dep. Exp. - Taxes
Formula 2 => OCF = NI + Dep. Exp. [Disregarding financing expenses]
Formula 3 => OCF = Sales - Costs - Taxes [Costs exclude all non-cash expenses]
Formula 4 => OCF = (Sales - Costs)(1-T%) + Depreciation*T% [ " ]