when we do a valuation for a emerging market equity.
CFA Equity curriculum book explains that DCF amounts for Nominal and Real valuation are same.
Can anybody explain why the both (Nominal and Real valuation) should be necessarily same?
In the valuation practice if the two amounts are not same, is there something wrong?
What page in the reading?
If they are the same why would we bother learning how to forecast in nominal and real terms when we could just forecast for nominal? I would assume they would be similar, but not exactly the same, because you’re discounting the net cashflow with the inflation assumptions in the nominal WACC vs. discounting individually adjusted cashflows via a real WACC.
The DCF value is the same for both nominal and real. This is because we forecast nominal cashflows and discount by nominal rate to get dcf value and we forecast real cash flows then discount back with real rate for dcf value. Technically the values should be same.
The value would be exactly the same ( there could be slight difference due to rounding errors).
Nominal Valuation = Nominal CFs/ Nominal WACC
Real Valuation= Real CFs/ Real WACC
The only difference is that nominal values are adjusted to an appropriate index to calculate Real CFs, and the Real WACC is also adjusted for inflation. And vice versa.
DCF value for both methods will be the exact same…
What about Taxes? Since they are always calculated at Nominal values they wouldn’t differ between real or nominal DCF but would still be discounted at different rates.