I don’t know if this is easy and I’m not getting it because it’s, or if I just don’t understand what the hell is going on with these two. I won’t write them down here because it’s too long and i’m tired, but my questions are these: 1) I don’t understand how unexpected inflation affects anything… Can someone explain what this means? 2) Question 48, I don’t understand why one goes up and the other goes down, but in question 9 they both moved together. wtf??? Thanks guys. I’m off to bed.
kant Wrote: ------------------------------------------------------- > 1) I don’t understand how unexpected inflation > affects anything… Can someone explain what this > means? Remember that any nominal financial rate consists of two parts: inflation cost and real-value return. The inflation-cost component builds into itself any “expected” change, so it’s only “unexpected” inflation change that causes resets in rates (or in the composition of rates), all else equal. In the problem, you’re dealing with two rates: a tax rate and interest-expense rate. These are set in advance and are not indexed to inflation, so if inflation unexpectedly falls, the inflation-cost components built into these rates decline in size relative to their real-value counterparts. Since the amounts of the full charges (depreciation and interest expense) do not decline, the real-value components INCREASE in relative size. Hence the answer ©. > 2) Question 48, I don’t understand why one goes up > and the other goes down, but in question 9 they > both moved together. wtf??? Here you were tripped up by the errata! (A) is the answer, and you are correct that the logic tracks the logic behind the answer to question 9. CFAI’s answer for question 48 is also illuminating. Moral: Go get the errata and adjust your text accordingly. 