Re-Evaluation of 'Terminal Value, Accounting Numbers, and Inflation' by Gunther Friedl and Bernhard Schwetzler

Abstract

In recent issues of the Journal of Applied Corporate Finance Friedl and Schwetzler (2011) and Bradley and Jarrell (2008, 2011) voiced opposing views on the relation between the retention rate/plowback rate and the growth rate in the context of the constant growth valuation model when considering inflation. We find that the discussed models represent two different versions of the constant growth model with different underlying assumptions regarding the implied capital maintenance. Reviewing the models under a consistent set of assumptions we resolve the dispute and illustrate that both models result in identical growth rates and consequently in identical value estimates.

Keywords: Terminal Value, Constant Growth Model, Valuation, Inflation