Corp fin topic test - England

Q2. Why should the real WACC be considered here? (When all other figures are nominal)

Please help!

Accidental post. Delete.

Please help.

I checked in the curriculum and it does not provide any insights here. Intuitively, one could argue that since you are talking about the economic profit, you want to adjust for all sorts of distortions/noise and therefore take the real WACC but I guess you could also argue the other way around for that one, as in you want to know what remains in your pocket after accounting for every cost.

Look at the top left corner of the table - says inflation adjusted, i.e. Real rates. The reference to ‘everything else being nominal’ is just for the items in that table and is impacted on the question regarding the calculation of r real rate. But the question for using real WACC it’s correct.

Moral of the story, we need to remember attention to detail.

Hope it is there, for this to make sense.

Also, in Q2. Why is working capital amount .62 for the year not counted?

Good question…I think it should be.

I also included .62 but seing the answer I reasoned that probably all B/S data is year end, so we would need to take into account the .62 only for the second year.

Like for FCInv. For the first year you take the gross beginning FCInv to calculate $WACC. In the second year you decrease it with the depreciation of the first year.

So summarized: FCInv and WCInv in Year zero are calculated into $WACC for year 1.

FCInv decreased by 1st year depreciation + zero and first year’s WCInv are calculated for $WACC for Year 2.

And so on.

But I’m not sure, would be important to know the truth.

I don’t think so Moosey, only because one of the later questions asks to calculate the terminal year non-operating cf and the calculation includes the .12 WCinv figure for 2018.

Yes I see your point. That’s the problem with these errors that one tries to find the reason in the official answer. I don’t remember having these many errors in Level I.

question. For inflation adjusted, does that mean it already taken into account of inflation? if that is the case, then the WACC should be adjusted for inflation. Please let me know. Thank you

What a humongous waste of our time. Maybe they should hear on this.

Than, inflation-adjusted means without inflation, so you have to discount with the real WACC instead of the nominal WACC.

Jolie, I agree.