Just wanting to post this to make sure I am not missing something.
I have just recently completed mock 4 and have been looking through the specimen answer. In the third part of the mock, part of it looks at financing options for a new facility with suggestions to be made and relevant technical knowledge show.
The specimen answer talks about the use of debt finance and how it attracts a tax shield thus enabling WACC to be reduced and how this makes it more favourable. Whilst this is normally the case, for Wodd I am working on the assumption that tax shields are irrelevant as they do not need to pay tax on their profits due to all the tax breaks the forestry industry attracts (unless in the real exam an unseen issue is based around a change in taxation) and the fact that tax is clearly not noted in the P & L.
On this basis I am assuming that it is not going to get any real marks bringing up the relative tax benefits of debt finance, is this how everybody else is interpreting it?
As per the pre-seen, income from forestry operations is tax free.That means, if Wodd venture in to other areas,it may have to pay tax.In such cases,financing the new project with debt makes sense because the interest payable will be tax deductible.
Good point, thanks for the tip, I initially thought that this was a mistake and that the answer was a standard one taken from other case studies... - this means that as soon as WODD ventures away from its core business in forestry, we should consider the tax impact. I sit my exam tomorrow - good luck to all of you!