A Note on Estimating Constant Growth Terminal Values with Inflation
8 Pages Posted: 25 May 2017
Date Written: May 24, 2017
Abstract
In path breaking articles, Bradley and Jarrell (2008, 2011), develop an analysis that properly accounts for inflation in the context of constant growth valuation models. They show that many traditional applications of the constant growth model err by failing to properly account for the impact of inflation on the existing capital stock. Despite the publication of the Bradley and Jarrell papers, many leading valuation texts including Damodaran (2012) and Koller, Goedhart and Wessels (2015) still employ variations of the traditional model and there remains a good deal of debate regarding the applicability of the Bradley-Jarrell approach. In that light, this short note offers a particularly simple and intuitive derivation of the Bradley-Jarrell results that makes it clear why the traditional models are in error.
Keywords: Valuation Inflation Constant Growth Model
JEL Classification: G00
Suggested Citation: Suggested Citation