Reading 43: Valuation in Emerging Markets - LOS a ～ Q1-3 class, market, company, emerging, expressed

cfaedu

1.When valuing an emerging market company using cash flows expressed in both nominal and real terms:

A)   both valuations are identical.

B)   each valuation differs by the inflation differential.

C)   both valuations are not reliable.

D)   each valuation differs by the country-risk premium.

2.With respect to emerging market companies, which of the following macroeconomic variables has the most impact on the estimation of cash flows?

A)   Inflation.

B)   Country risk.

C)   Political risk.

D)   Deflation.

3.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 financial statements using the temporal method.

D)   historical and forecasted financial statements in both nominal and real terms.

cfaedu

答案和详解如下：

1.When valuing an emerging market company using cash flows expressed in both nominal and real terms:

A)   both valuations are identical.

B)   each valuation differs by the inflation differential.

C)   both valuations are not reliable.

D)   each valuation differs by the country-risk premium.

The correct answer was A)

In order to adjust for the influences of inflation, company cash flows will require restatement in both nominal and real terms. Construct historical and forecasted financial statements in both nominal and real terms. Calculate the nominal cash flows and convert them to real terms. Discount the nominal and real cash flows to determine their respective valuations for both terms. The valuations under both terms should be identical.

2.With respect to emerging market companies, which of the following macroeconomic variables has the most impact on the estimation of cash flows?

A)   Inflation.

B)   Country risk.

C)   Political risk.

D)   Deflation.

The correct answer was A)

Emerging markets are characterized by high inflation. Inflation affects the financial statements by creating distortions in non-monetary assets (i.e. property, plant, equipment and inventories). Cash flow projections used in valuations, as well as most financial ratios, will also be distorted.

3.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 financial statements using the temporal method.

D)   historical and forecasted financial statements in both nominal and real terms.

The correct answer was D)

Construct historical and forecasted financial statements in both nominal and real terms. Historical financial statements are translated to real terms by using the current method. Forecasted financial statements in real terms are then created and then converted to nominal terms. Finally, calculate the nominal cash flows and convert them to real terms.