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Question # 1, Dec/08 (Blipton Int.).
Could anyone tell me why the Revenue was not inflated by inflation rate but Cost of capital was used as nominal cost of capital.- Topics: 2
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Hi Nazrul5,
All information except for the cost of capital is given in nominal terms. In short:
1. Revenue,costs,etc – Nominal Cash flow
2. Cost of Capital – Real Value.The rule is thus: use real cost of capital for real cash flows or use nominal cost of capital for nominal cash flows.
(The Nominal Cost of capital incorporates inflation)To solve the question:
A] Convert all cash flows to real value (long process) then use REAL COST OF
CAPITAL
B] Use Nominal cash flows and change real to nominal (WACC) – RecommendedHope this helps
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