# question on book 6 3AM test- errors errata bigtime!

question 19- here’s the answer- my question is how do you know tax rate is 40%? i kind of guessed it fine b/c the outlay wasn’t hard and then looking at the 2 answers you figured the trap one was the one that didn’t include the 75k salvage. these calcs all make sense, but am i nuts or did they never give us what we needed to get a tax rate? Your answer: B was correct! Initial investment outlay = purchase price + increase in net working capital + shipping and installation costs = \$700,000 + (\$50,000 - \$20,000) + \$100,000 = \$830,000 Terminal year after-tax non-operating cash flow (TNOCF) = SalT + NWCInv − T(SalT − BT) = 75,000 + 30,000 − 0.4(75,000 − 0) = 75,000 After-tax operating cash flow (year 4) = (S – C)(1 – T) + DT = (\$750,000 – \$225,000 – \$75,000)(1 – 0.4) + (0.4)(\$56,000) = \$292,400 The book value at the end of year 4 is \$0 because total depreciation over the four years was \$800,000. total CF (year 4) = \$292,400 + \$75,000 = \$367,400 (Study Session 8, LOS 31.a) Also, in errata from schweser: Exam 3 Morning Page: 158 - Omission In the vignette for questions 19-24 related to Cummings Enterprises, Inc., we inadvertently omitted the information needed to calculate the CEI’s WACC of 8 percent. Posted: 2008-05-12 Umm, thx schweser! This goes to q # 21 on the vignette- i couldn’t figure out where those answers were coming from. and # 23 you’d need the WACC again, sweeeet! no wonder i spent so much time on this vignette very frustrated!!! tax rate though- is there some way i could’ve figured this out from the vignette or was that missing also? THANK YOU IN ADVANCE

I just finished that test. You can back into the tax rate with the total after-tax cash flows given in the table. 186,000(1-x) + 264,000 = 375,600 40% tax rate. Edit: It is bull that they forgot to mention the WACC when reviewing the questions before publishing them.

perfect thx nibs- makes sense. so then did you for the Yr 4 instead of all of that schweser stuff above just take the 394(.6) + 56 = 292.4? easy peasy… sweet. thx.

There is also errata in another vignette near the end. It has to do with stock paying a \$1 dividend. Make sure you look at that.