Valuation in emerging market question.

CFA Level II
#1

I don’t think I understand this as well; Could someone pls throw some more light: FCinv in Nominal terms in not a plug in figure whereas in Real terms it is. Why is that?

#2

Also, how does that lead Net PPE to be understated in Nominal terms?

#3

If you’re looking at an Em Market country with hyperinflation, the PPE is carried on the balance sheet at historical costs, so its value falls plummets toward zero as the currency inflates and other assets are carried at market value.

#4

Thanks ilvino – I guess that explains question 2 but what about question 1 about FCinv being the plug in figure for Real valuation but not for nominal valuation?

#5

This is what I think… [PLUG Figure -->] (Real)FCInv = End PP&E – Beg PP&E + Depr But to calculate FCInv in emerging markets, where the inflation is high, the End PP&E and Bgn PP&E values don’t make much sense as explained by ilvino. So best we could do to get to this amount would be to mult the (Real)FCinv by the inflation rate to get (Nominal)FCInv