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

# Quick Question- CFA Corporate Finance Topic Test #3 England

• Author
Posts
• hardj
Participant
• CFA Level 1
17

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.

• googs1484
Participant
• CFA Level 3
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
5

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
1

You are absolutely right on the rationale. I’ll take a look at the question tonight.

• googs1484
Participant
• CFA Level 3
1

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 ðŸ˜‰