Hi, I had a quick question in regards to the CFA Topic Test entitled "England" for Corporate finance (Level II Topic Test #3). In this case, question #2 asks "Prior to her first conversation with Weinberger and based on the information from Exhibits 1 and 2, England's estimate of the 2014 economic profit for the new division (in millions) is closest to:" The solution to this answer uses the real WACC to calculate Economic Profit. However, the note in exhibit 2 clearly states that "All values are nominal except for real WACC". Why are we using the real WACC in calculating economic profit on "Nominal" numbers? I was under the impression that when we have nominal cash flows, we use nominal discount rates and when we have real cash flows, we use real discount rates. Thanks in advance!

Okay so I looked at the question. If it were me, I would of, in this case, adjusted the real WACC using .101* 1.0078 to get a nominal WACC of 10.178%. It does say everything is nominal so we should be using a nominal discount rate as you said. In either case the answer is B because it does not even come close to the other two options. I am assuming the answer is B. I did not submit my answer for only question to verify.

Look at the top left corner of the statement, it says "inflation adjusted" so real WACC is required and C is the correct answer.

A CFA Level 2 Discussion About Quick Question- CFA Corporate Finance Topic Test #3 England

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This topic has 4 replies, 3 voices, and was last updated Oct-189:36 pm by googs1484.

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- hardj
  Participant
  - CFA Level 1
  15 Oct 2018 at 7:36 am
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  17
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  Hi,
  
  I had a quick question in regards to the CFA Topic Test entitled “England” for Corporate finance (Level II Topic Test #3).
  
  In this case, question #2 asks “Prior
  to her first conversation with Weinberger and based on the information from
  Exhibits 1 and 2, England’s estimate of the 2014 economic profit for the new
  division (in millions) is closest to:”
  
  The solution to this answer uses the real WACC to calculate Economic Profit. However, the note in exhibit 2 clearly states that “All values are nominal except for real WACC”.
  
  Why are we using the real WACC in calculating economic profit on “Nominal” numbers?
  
  I was under the impression that when we have nominal cash flows, we use nominal discount rates and when we have real cash flows, we use real discount rates.
  
  Thanks in advance!
- googs1484
  Participant
  - CFA Level 3
  17 Oct 2018 at 9:24 am
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  5
  ::
  Okay so I looked at the question. If it were me, I would of, in this case, adjusted the real WACC using .101* 1.0078 to get a nominal WACC of 10.178%. It does say everything is nominal so we should be using a nominal discount rate as you said. In either case the answer is B because it does not even come close to the other two options. I am assuming the answer is B. I did not submit my answer for only question to verify.
- Antoine
  Participant
  - CFA Level 2
  20 Oct 2018 at 9:09 pm
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  5
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  Look at the top left corner of the statement, it says “inflation adjusted” so real WACC is required and C is the correct answer.
- googs1484
  Participant
  - CFA Level 3
  16 Oct 2018 at 9:07 am
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  1
  ::
  You are absolutely right on the rationale. I’ll take a look at the question tonight.
- googs1484
  Participant
  - CFA Level 3
  20 Oct 2018 at 9:36 pm
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  1
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  I don’t feel like going back to look at it again so I will just take your word for it ha ha. I remember it said nominal in the item set somewhere so if there was another part I missed then so be it 😉
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