Expected Inflation
The valuation of every company rests on the assumptions we make about expected inflation in the future. This section begins by looking at why inflation has such an impact on value, how inflation rates have behaved in the past, and how much and why inflation rates vary across currencies.
Why Does Expected Inflation Matter?
As we noted in Chapter 6, valuations can be either nominal or real. If they’re nominal, the expected inflation rate is built into both the cash flows and the discount rate. In nominal valuations, expected inflation affects key inputs that we use in our analysis:
The risk-free rate is the interest rate on a default-free bond and thus has an expected inflation rate built into it. Consequently, the cost of ...
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