A Note on Estimating Constant Growth Terminal Values with Inflation

8 Pages Posted: 25 May 2017

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Richard Gerger

San Marino Business Partners LLC

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

Cornell, Bradford and Gerger, Richard, A Note on Estimating Constant Growth Terminal Values with Inflation (May 24, 2017). Available at SSRN: https://ssrn.com/abstract=2973345 or http://dx.doi.org/10.2139/ssrn.2973345

Bradford Cornell

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Richard Gerger (Contact Author)

San Marino Business Partners LLC ( email )

607 Foxwood Road
La Canada Flintridge, CA 91011
United States

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