SS 11, Reading 38, EOC Q#2 help needed

I have been trying to figure out this problem for a while and if anyone could help me, I’d really appreciate it!

On reading 38 in CFA curriculum, end of chapter question #2: It gives me in exhibit 1 “selected nominal financial indicators for 2008” and it asks for projected sales in nominal terms in 2012. I understand that to solve this, I need to take the real sales find out what the projected is using real sales growth and then convert to nominal sales using the inflation index (inflation amount per year multiplied). However, the answer has me using the total sales given in exhibit 1 which is titled “selected nominal financial indicators”. Is this an error or does anyone have any insight on what I’m doing wrong??

I observed it. I assumed 2008 inflation as 0, since it is not given. Pls correct me.

So, are you saying that because inflation in 2008 is zero, then nominal and real is the same?

I have another thought also. We should be using 2008 nominal sales (= 2008 real sales x 2008 inflation)

2008 nominal sales = 2008 real sales (not given) x 2008 Inflation (not given).

In any case next-year nominal sales = last-year nominal sales x nominal growth.

nominal growth = real growth x Inflation.

Instead of supplying 2008 real factors, the exhibit supplied 2008 nominal, which is fine.

What do you say?

I see, that makes sense if you think of it in the way of calculating nominal growth and don’t think about the real sales aspect. It was confusing because in the explanation in the CFA curriculum. However, then look at #3, where they state that 2009 real sales is the given nominal sales * real sales growth. They go from that point on to solve the problem of gettting 2009 real NOPLAT. Am I overthinking this?

What they are saying is,

2009 real sales = 7,671,000 x 1.06 x 2009 inflation / 2009 inflation

You can get real sales by dividing nominal sales by 2009 inflation.

So, 2009 real sales = 2009 nominal sales / 2009 inflation = 8,131,260

I hope it is clear now.

Inflation is 10% for 2009 so I’m confused on how you’re saying that it = 8,131,260.

(7,671,000 * 1.06)/1.1 = 7392.5

This is still confusing . . .

2008 data is already inflation adjusted. If you need to find the nominal sales of 2009 then you need to multiple the 2009 growth in real terms and then multiply it with 2009 inflation index to get nominal sales of 2009. Continue applying this for 2012 you’ll get the answer.

Suppose if you are provided with the 2008 real sales data along with inflation of 2008 and you use the data to get 2009 nominal sales, you’d have multiplied 2008 real sales with real growth of 2009 and then multipled with both years nominal index to get to the final answer. You see its other way round. If you are provided with nominal data it implies that it is inflation adjusted and you are given the real growth for the next year, which implies that the number of units sold would increase (based on the same price levels) and then multiplying it with inflation index gives the dollar amount which one would generate after selling those number of goods. In other words real and nominal growth are referring to the actual number of goods and the price of each good respectively. Real growth is referring to actual number of goods and inflation is referring to the increase in price of one good. If we multiply nominal sales with real growth then it implies that the price levels have remained the same (0 inflation thus 1+0 is the inflation index) and actual numbers have increased but if price levels also shift up and their is an increase in no. of units sold then we multiply with both the inflation index and the real growth.

I hope it helps.

Ok, I think I’m getting the idea. . . basically no inflation was given for 2008 so like in the examples in the CFA text for exhibit 3 there is no inflation given for year 1 so real and nominal are the same.

Ok thanks everyone!

I think if no inflation is given then interperating it as equal to real might be deceiting. I believe nominal values have already been incorporated for real growth and inflation index. Like in the question nominal sales were given which implies that they have been adjusted for both inflation and real growth as compared to the previous year.