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Thin capitalisation

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Thin capitalisation


Can anyone explain why the equity required for the full interest deductibility in Question 5 b) of F6 POL 2014 Dec was calculated as follows:

e = (100 million – e) * (1+ interest rate)/3?

e - equity
100 (million) - debt

I'm fully aware that the equity-to-debt ratio governing the application of this rule has changed from 1:3 to 1:1 since 01.01.2015, yet I can't seem to understand why the formula (after some reworks) would be

e / [(100 - e)*(1+i)] = 1:3

I'm puzzled by what's in the denominator. Why the excess interest portion (100-e) is multiplied by (1+i)?
Why not simply:

e/100*(1+i) = 1:3

Interest are included because of the conservative approach.

August 23rd 2018 AN ACCA USER 330 Points
Edited August 23th 2018 AN ACCA USER

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