Q15 calculating the HC they have used a discount rate of 9%
the CFA errata says not to include the wage growth rate as part of the discount rate so this must be an error???
Are other candidates in agreement?
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They multiplied the salary with wage growth too. If you had calculated salary without wage growth then you wont include it in discount rate, but here they clearly increase salary by wage growth and hence they include it in discount rate. You’ll get the same result either way.
@ Gigaloo
As per Pg 385, they increased salary by wage growth but did not include it in discount rate.
As per Boylan Case, they incerased salary by wage growth and included it in discount rate.
Thats not the same result, is it?
Comments anyone?
Yes please we need comments on the above. Thank you
you are correct, its in the errata
https://www.cfainstitute.org/programs/cfaprogram/candidate/Documents/level_III_mock_exam_errata.pdf
^ Thanks. First time seeing that errata.
In my opinion, there is a difference about inflation rate and wage growth rate. There can be real wage growth rate which is always compounded in numerator but this growth rate is never added to real growth than is supposed that real risk free rate is adequate discount factor for real values in numerator.
Wages in numerator may be compounded on nominal basis by multiplying with (1+I) and inflation rate should also be added to discount rate in denominator. The output would be the same. Specific Income volatility rate should always be added in denominator and value in numerator should always be compounded with surviving probability.
I think you should write that for your answer if this is featured on the exam and see what happens.
Thanks, this cleared up my wrong understanding.
That’s exactly what they say on errata link you posted. Maybe my explanation was not clear but doesn’t matter. Of course, I will solving questions on real exam in the manner I think it should be solved. The only thing what is interesting to me is passing the exam. Also, I would not have a review into exam so will not know what I screwed.
well it would be nice if at least the errata was correct - I overlooked it because the title is CFA Level II errata …
This errata is correct. It follows the same method as the bluebox example.