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September 2004, Q17

Z

ZebuAlex

Member
This question asks you to calculate the interest cover.
The answer they give does not take into account that the preference share dividend is paid post-tax and so doesn't divide the dividend by 0.72 (i.e 1-corporation tax rate).
However, in the tutorial handout this question was covered and here we DO divide by 1-tax rate.

Which of these is correct/applicable in an exam?
 
I have NO clue, In the revision notes there is a full question analysis on this question and the denominator is the franked preference dividend payout?
 
Hi

I think either would be fine in the exam. Often with the various ratios there are several possible variations in the definition and which particular variation we use isn't generally critical.

So, either simply using the preference share dividend (which is what the examiners report and the revision notes do) or doing the grossing-up adjustment to reflect the different tax treatment of dividends (which is what the tutorial handouts do) is equally ok.

Best wishes
Lynn
 
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