EM Valuation, Remeasuring Cash Flows with Inflation convert, contrast, appears, why

laurab

So for those of you who have this down, I'm confused of how strict you have to be on the order of a few of the steps. Specifically:

1) It seems like you have to calculate WCInv & taxes from nominal cash flows, and then convert them both to real by using the inflation index for that year. The taxes make sense to me, as you would be paying taxes on nominal CF's in real life, but why must WCInv be calculated from nominal?

2) In contrast, it appears that FCInv must be calculated from real CFs, then converted to nominal to get FCInv nominal. Any reasoning behind this?

I'm referring to pages 111-130 in Schweser Equity and the EOC on pages 299-303 in CFAI Equity book.



Edited 2 time(s). Last edit at Saturday, May 28, 2011 at 10:11AM by ftwcfa.