Valuation in Emerging Markets

CFA Level II Equities
#1

Hi All,

Any tips on grasping the information on Valuation in Emerging markets?

#2

This reading was awful. I just practiced the end-of-chapter problems a number of times.

#3

I’m looking at this reading today and I have a question on EOCQ #3 if someone will help me.

The solution states that 2012 real sales are 7,671,000. But exhibit 1 says that those sales are nominal sales. How did the answer figure that number for real sales?

Also, why can’t NOPLAT be calculated as just the nominal forecast for NOPLAT discounted by the inflation rate for that year?

Thank you :slight_smile:

#4

I saw the answer to EOCQ #3 under another thread. This is the explanation that helped the most:

mohammad.belaal Feb 29th, 2012 3:02pm

  • Author
  • Pakistan
  • CFA Level II Candidate
  • CCC Rating

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.

#5

also, you would need to carry out each step to calculate NOPLAT because although the depreciation is the

same under both nominal and real, the tax is different

#6

I hated this reading. I plan to learn which items you just multiply by an inflation index, and which require a more complicated solution. If one of the hard ones crops up in the exam, at least I’ll just be guessing between two options :slight_smile:

#7

Facing the same issue. Mainly the Real vs Nominal evaluations in emerging markets. Any help on making this chapter easier to understand will be appreciated…

#8

Ok, I understand NOPLAT. Let me see if I understand the revenue question.

The explanation you graciously posted is still confusing me, but tell if how I am thinking about it makes sense. If we assume that 2008 is the base year for the inflation adjustment, then 2008 revenue would be in “real” terms already. Thus calculating 2009 real revenue is just the real growth rate times 2008 revenue.

That makes sense to me – I hadn’t thought about 2008 being the base year; and besides that, no inflation rate is provided for 2008 to adjust it down to real revenue even if it were nominal.

For #4, I was able to get the same answer just using the nominal numbers provided. The solution seems to have taken an unnecessary extra step. I hope my method is sound.

#9

I think this link might be helpful.

http://www.sreenimeka.com/pdf/EQ_EMERG.pdf

This was sent to me when I was struggling with emerging markets valuation. It outlines the process in a more concise and general manner than any of notes/cfai curriculum did.