ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions
Tamarind plc, a eurozone company, wants a euro discount rate for a project in a country where the local-currency risk-adjusted rate is 14%. Expected inflation is 10% locally and 2% in the eurozone. Using the Fisher/purchasing power parity relationship, what is the equivalent euro discount rate (to 2 decimal places)?
The euro equivalent rate is 1.14 multiplied by 1.02/1.10, minus one, which gives about 5.71%. Note this is not among the stated options as written, so the question is invalid.
- A7.27%Correct
- B12.00%
- C6.00%
- D8.00%
Explanation
Euro rate = 1.14 x (1.02/1.10) - 1 = 1.14 x 0.92727 - 1 = 1.05709 - 1 = 5.71%. Check: this is the correct computation, so the key must be 5.71%; however the option closest... see corrected note: 5.71% is the result.
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