Inflation and the Constant Growth Model – Reconciling the Literature

Abacus, Vol. 48, Issue 4, pp. 518-538, 2012

25 Pages Posted: 4 Aug 2010 Last revised: 14 Oct 2013

See all articles by Daniel Kiechle

Daniel Kiechle

University of Hohenheim

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences

Date Written: August 3, 2010

Abstract

We formulate a generalised constant growth valuation model incorporating inflation and capital maintenance. We find that in general there are two sources of growth: growth due to capital maintenance and growth due to net new investments. The generalised version of the constant growth model allows to reconcile the existing literature, particularly the works of Gordon and Shapiro (1956), Lally (1988), and Bradley and Jarrell (2008), which all employ particular definitions of capital maintenance. Evaluating the practical relevance of either model we find that each model is best suited for a very particular company set-up, which does not necessarily correspond to the commonly observed business models. The generalised version of the constant growth valuation model however presents a flexible approach that is capable to capture various conceptions of capital maintenance.

Keywords: valuation, constant growth model, inflation, capital maintenance, terminal value

JEL Classification: G12, G30, M40

Suggested Citation

Kiechle, Daniel and Lampenius, Niklas, Inflation and the Constant Growth Model – Reconciling the Literature (August 3, 2010). Abacus, Vol. 48, Issue 4, pp. 518-538, 2012, Available at SSRN: https://ssrn.com/abstract=1652967 or http://dx.doi.org/10.2139/ssrn.1652967

Daniel Kiechle

University of Hohenheim ( email )

Fruwirthstr. 48
Stuttgart, 70599
Germany

Niklas Lampenius (Contact Author)

University of Hohenheim - Faculty of Business, Economics and Social Sciences ( email )

Stuttgart, 70593
Germany

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