Pop Quiz - Emg Mkts

What are the 4 reasons that we adjust the cash flows instead of the discount rate for valuing companies in emerging markets? Annnnd go! (If you don’t know these cold, you probably want to before 6/7)

just did it yersterday… still very difficult to recall them all… hope they are correct 1. country one-sided risk 2. diff companies in same countries are affected by inflation differently 3. the risk can be diversified away by having a low correlation 4. to keep the risk mgmt team employeed so that they come up with ways to eliminate them

here goes: 1. country risks are diversifiable 2. comparable companies will respond differently to country risk 3. country risk is one-sided 4. being able to identify the cash flows aids in the risk management process how did I do?

diversifiable one-sided different companies react differently don’t remember the last one

I love how AF keeps knocking my confidence back down. I’m pretty sure I did EM on saturday, and I only remembered diversifiable off the top of my head. Now I have something to read tonight!

Don’t worry, I could only think of inflation as a reason. Saying it 5 times in my head and ill try to remember it tomorrow.

You guys nailed it. I like the reference to “keeping risk management employed” - clever! Answers from the schweser cheat sheet: Country risks are diversifiable Companies respond differently to risk Country risk is one-sided (only to the downside) Identifying cash flow effects aids in risk management. Here goes round 2: In order to properly measure the cash flows of an emerging market company to consider the impact of inflation, one starts the process by constructing the: A) forecasted financial statements using the current method. B) forecasted financial statements using the temporal method. C) historical and forecasted financial statements in both nominal and real terms. D) historical financial statements using the temporal method.


Definitely C.

Way too easy. OK one more for the moment: Waving Enterprises is headquartered in an emerging market nation that is expected to have 27 percent inflation over the next year. Johnson expects the local government to be successful in bringing inflation under control, and anticipates that it will fall to 20 percent in the second year and 10 percent in the third year, where he expects inflation to stabilize. Johnson is considering an investment in Waving, and has calculated the real weighted average cost of capital (WACC) for Wavington at 8 percent. Johnson makes the following statements: Statement 1: The nominal WACC for Waving next year is 35 percent. Statement 2: The firm value will be approximately the same using either the real or nominal approach to valuation. With respect to these two statements, Johnson is: Statement 1 Statement 2 A) Incorrect Incorrect B) Correct Incorrect C) Correct Correct D) Incorrect Correct

Q1 . C Q2. D? 1.08*1.27 = 1.376 - 1 = 37.16% = INCORRECT ------- CORRECT

D Incorrect - Correct With you on this one dinesh


C D i think i did it before tho

Yeah you guys got it. Nice job.