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Inflation, Investment and Valuation

Author

Listed:
  • Cornell Bradford

    (Emeritus Professor of Finance, Anderson Graduate School of Management, UCLA, Los Angeles, CA, USA)

  • Gerger Richard

    (Cornell/Gerger, Los Angeles, CA, USA)

  • Jarrell Gregg A.

    (Emeritus Professor of Finance and Economics, Simon Business School, University of Rochester, Rochester, NY, USA)

  • Canessa James L.

    (Forensic Economics, Rochester, NY, USA)

Abstract

In any context where a discounted cash flow valuation is required, there is the issue of estimating the continuing value. The most common way to do that is to assume that by the terminal horizon the company is in a steady state and is growing at a constant rate. The issue is how to handle inflation. The problem is that it is often done wrong and the impact is typically material. Because there remains significant confusion, in this paper we simplify the analysis by isolating the two key issues and providing example calculations. We show that even at the current 2% level proper treatment of inflation has a sizeable impact on valuation. If inflation were to accelerate as a result of current monetary and fiscal policies, the significance of this issue will increase.

Suggested Citation

  • Cornell Bradford & Gerger Richard & Jarrell Gregg A. & Canessa James L., 2021. "Inflation, Investment and Valuation," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 16(1), pages 1-13, February.
    • Handle: RePEc:bpj:jbvela:v:16:y:2021:i:1:p:1-13:n:5
    DOI: 10.1515/jbvela-2020-0029
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    Cited by:

    1. Ionela Munteanu & Flavius Valentin Jakubowicz, 2022. "A Bibliometric Analysis of Scientific Accounting Studies Concerning Fiscal Topics," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 920-926, Decembrie.

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