You invest BRL 1 million in land on the coast of Brazil. You expect the land to retain its BRL 1 million real value for the foreseeable future. The annual risk-free rate of interest in BRL is 10 percent. The market risk premium on the local Brazilian stock market is 5 percent per year. Expected annual inflation in BRL is 8 percent. The Brazilian corporate income tax rate is 40 percent. What is the expected nominal value of the land in two years before taxes?

Question

Quizplus · Accepted Answer

The expected nominal value of the land in two years before taxes can be calculated by considering the expected annual inflation rate, which is 8%. Since the land is expected to retain its real value, its nominal value will increase with inflation. The formula to calculate the future value with inflation is: Future Value = Present Value * (1 + inflation rate)^n, where n is the number of years. Therefore, the calculation is BRL 1,000,000 * (1 + 0.08)^2 = BRL 1,166,400.

You Invest BRL 1 Million in Land on the Coast