Inflation, Investment and Valuation

20 Pages Posted: 20 Nov 2020 Last revised: 22 Feb 2021

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Richard Gerger

San Marino Business Partners LLC

Gregg A. Jarrell

University of Rochester - Simon School

James L. Canessa

Forensic Economics, Inc.

Date Written: February 15, 2021

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 size-able impact on valuation. If inflation were to accelerate as a result of current monetary and fiscal policies, the significance of this issue will increase.

Keywords: inflation, investment, valuation

JEL Classification: G00, G10

Suggested Citation

Cornell, Bradford and Gerger, Richard and Jarrell, Gregg A. and Canessa, James, Inflation, Investment and Valuation (February 15, 2021). Available at SSRN: https://ssrn.com/abstract=3722866 or http://dx.doi.org/10.2139/ssrn.3722866

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

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

Richard Gerger

San Marino Business Partners LLC ( email )

607 Foxwood Road
La Canada Flintridge, CA 91011
United States

Gregg A. Jarrell

University of Rochester - Simon School ( email )

Carol Simon Hall 4-110H
Rochester, NY 14627
United States
585-275-3914 (Phone)

James Canessa

Forensic Economics, Inc. ( email )

95 Allens Creek Road
Bldg. 2, Suite 303
Rochester, NY 14618
United States
585-385-7440 (Phone)

HOME PAGE: http://www.forensiceconomics.com

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