When you calculate NPV, and you've given the risk-free interest, expected inflation rate, and market risk premium & beta, to calculate the cost, do you use:
Time 0 = -125,000
Time 1 = 100,000
Time 2 = 200,000
If the risk free interest rate is 4%, expected inflation is 3%, the market risk premium is 8% and the beta for the project is 1%, the investment's net present value (NPV) is closest to:
A) $113,000
B) $124,000
C) $139,000
If you add the Risk-Free + Expected Inflation to get the nominal rate of 15.12, before calculating using CAPM, you will get I of 12.15% and you get answer A.
BUT,
If you don't add the Risk-Free to Expected Inflation and just use the 4% risk-free rate, and you calculate the cost, you will get 12% and get answer B.
Why the difference?作者: kd26gioi 时间: 2011-7-11 19:48
If the risk free interest rate is 4%, <-- i take that to mean its the nominal rate, so don't adjust for inflation.
I would say B作者: LokiDog2 时间: 2011-7-11 19:48
You should be using 15.12, you have to use nominal risk free rate and not just risk free rate. Clearly mentioned in Schweser.作者: ajpheif16 时间: 2011-7-11 19:48
guys, i've been sleeping for one hour so...
my opinion:
- real RFR must be transformed int nominal RFR, (1.04)*(1.03)-1 = 7.12%
- expected market return of 12%
- beta 1
ke= 12%作者: kasinkei 时间: 2011-7-11 19:48
acer Wrote:
-------------------------------------------------------
> You should be using 15.12, you have to use nominal
> risk free rate and not just risk free rate.
> Clearly mentioned in Schweser.
If a rate is not clearly labeled as REAL, you can assume its a nominal rate. the inflation rate is there to confuse you. the 3% inflation is already included in the 4% (If we assume the 4% is nominal).
We all know to use the nominal rate...the real question is, if a RFR is not clearly labeled as REAL or NOMINAL, which should we assume it is? Schweser says assume its nominal unless CLEARLY stated as REAL.
Damil - whats the answer? the wording is unclear on this one
Edited 1 time(s). Last edit at Friday, June 5, 2009 at 10:42AM by june2009.作者: Wasteoftime 时间: 2011-7-11 19:48
If RFR is given and it's not mentioned whether it's real or nominal, is it not safe to assume that it's a nominal rate? Even if the expected inflation rate is mentioned in the question..(like Damil's question up there)作者: Ionutzakis 时间: 2011-7-11 19:48
P 216 Schweser book 4.
If a RFR is given with no qualifiers, it IS SAFE to assume its nominal.作者: pacmandefense 时间: 2011-7-11 19:48
I think I've seen this question before. As june2009 mentioned, who needs a more creative handle btw, if it is labeled as the risk free rate I believe you can safely assume that that rate is in fact the nominal risk free rate. I believe that will solve the problem correctly.作者: joemoran 时间: 2011-7-11 19:48
I thought that sounded familiar..作者: eagles_dare13 时间: 2011-7-11 19:48
i agree...unless mentioned, consider nominal.
the point i just want to make is that if you adjust for inflation you will also get 12%...because market risk premium will calculated based on that adjusted rate...
i always get 12%, either ways...作者: ramzes 时间: 2011-7-11 19:48
agree with tigas... unless mention REAL risk free, consider risk free, nominal.
