If a business starts the year with equity of £1.5m,ends the year with £1.8m and inflation is at 10%,how much can it pay out in profit if a Current Purchasing Power (CPP)approach is taken?
A) 0.15m
B) 0.3m
C) 0.18m
D) 0.03m

Question

Quizplus · Accepted Answer

The CPP approach aims to maintain the real value of equity, which is the equity adjusted for inflation. The increase in equity due to inflation is £1.8m - £1.5m = £0.3m. To maintain the real value of equity, the business can pay out in profit up to this amount, which is £0.3m.

If a Business Starts the Year with Equity of £1