Your exam markers apply two important principles:
The easiest marks available for each part are usually the first ones. So our answer plans need to (a) identify all the separate parts and (b) give us a framework for answering each of the sub-parts. Let’s look at an example from the April 2013 exams.
A recent survey investigated the popularity of different project appraisal techniques in current use. One difference was the method of identifying an appropriate tax rate for the shelter of debt.
The effective tax rate was used by 64% of respondents. Marginal tax rate was used by 29%, and 7% used a target rate.
What are the pros and cons of using the effective tax rate versus the marginal tax rate? Define ‘effective’ and ‘marginal’ tax rates. (2.5 marks)
MCT General Exam, April 2013, Q1(d)
Feeling we know too little about the topic is obviously a problem. We might give up and miss the easy marks on offer. Knowing too much can also be a problem. We might write for too long and overrun our time allocation, missing the easy marks on later questions.
However little – or however much – we know about the topic generally, we need to answer the precise question asked. In either case, a table is a great structure for an answer plan.
The first sentence in this question requirement includes both (i) ‘pros and cons’ and (ii) ‘effective tax rate versus marginal tax rate’. This strongly suggests a 2 x 2 planning grid of some kind. If we jot down ‘pros’ and ‘cons’ as column headings initially, we have:
(It’s absolutely fine to use well-known abbreviations – such as ‘ETR’ above – in your answers.)
Even if the question doesn’t expressly mention pros and cons, they are a great structure to start thinking about almost any question (see Darwin’s Top Tips below).
Turning back to this particular question, we can’t read our specific requirement too often or too carefully. So let’s look at this requirement again.
We’ve missed something – the second sentence in the requirement: “Define ‘effective’ and ‘marginal’ tax rates.” It’s more logical to offer our definitions first, so now we have three sub-parts (definition, pros and cons) to answer about both ETR and the marginal tax rate.
It’s usually easier to have fewer columns, and more rows if we need them. So, turning our table around, add one more row. We now have ‘ETR’ and ‘marginal tax rate’ as column headings, and the definition, pros and cons, as row labels. Make sure there’s plenty of space to fill in the blank cells later.
This table structure has many important benefits:
This example question is a short one. The allocation of 2.5 marks implies around four minutes of answering time. So, in this case, we can produce our final answer simply by completing the empty cells in our table, as follows:
Did you have enough space to write your answers within the table? Big tables are easier.
Notice how few words we need, using this table structure, to make our meaning entirely clear – about 20 additional words. This concise response would certainly have scored a pass out of 2.5 marks.
Candidates sometimes worry that they may be making statements that are too obvious to be credited. For example, we’ve said that ETR is easy to calculate, but technically wrong, for project appraisal purposes. Do we still need to go on to make the two comments to the right: that the marginal tax rate is technically correct, but usually more complex to calculate?
The answer is: “Normally say it, but concisely.” Especially if we are expressly asked for pros and cons in the question, as in this case. If we’re not asked expressly in the question, and we are short of time, make a very brief statement to the same effect, such as “and similarly” or “and vice versa”.
The reason for writing something in all cases is that points that are obvious to you and me may not be at all obvious to all the other exam candidates. So we need to differentiate our exam script from all of their scripts.
If we still have time and have more relevant points to make, we should continue writing until the end of our time allocation. For example, in this question, we can expand on our initial comments – using the same table structure – as follows:
The response above would have earned the full 2.5 marks for this short question.
If we’re answering a longer question for more marks, we will expand the type of comments below with much more detail. But our table below will still be an excellent plan for our longer-form full narrative answers.
An accounting measure that is calculated by dividing the net tax charge reported in the income statement (for example, £11m) by the related accounting profit before tax (PBT) (for example, £71m).
In this case, ETR = 11 ÷ 71 = 15%.
The average rate of tax relief enjoyed by a company on its actual debt servicing costs.
This marginal tax rate is usually higher than the effective tax rate, because of the tax management of debt. The marginal rate is the technically correct tax rate to use for cost of capital and project appraisal.
In practice, other tax rates are also widely used as quicker approximations.
Download the previous articles from this series and other useful study information from the exam tips area of the ACT student site at study.treasurers.org/examtips
Doug Williamson FCT is an examiner, tutor and exam scrutineer for six ACT exam courses