标题: inflation flow through [打印本页] 作者: SkipE99 时间: 2011-7-13 14:54 标题: inflation flow through
Seen many contradictions on this:
If required return = 10%
inflation = 1%
flow through = 100%
is the P/E 10 or 11?作者: random_walker47 时间: 2011-7-13 14:54
Btw, 1/r is the highest P/E you can achieve in this context so it would be impossible for the P/E to be greater than 10.作者: wizofoz 时间: 2011-7-13 14:54
Its 11. You have to adjust the required return for inflation, so you will have 1/(.1-.01). Since its full flow through you wont have any additional adjustments.作者: OmarAdnan 时间: 2011-7-13 14:54
Head in hands...
Edited 2 time(s). Last edit at Friday, May 27, 2011 at 05:45PM by Chuckrox8.作者: Rasec 时间: 2011-7-13 14:55
This depends on your given required return. If it's real, P/E = 10. If it's nominal, P/E = 11.2*作者: lucasg85 时间: 2011-7-13 14:55
Yep, r has to be real r. So if given nominal r, you must subtract inflation rate to get real r.作者: iteracom 时间: 2011-7-13 14:55
The formula is
1/[(r-i)+(1-inflation flow through rate)*(inflation rate)]
P/E = 1 / (nominal - (inflation flow through rate) x (inflation ) )
OR
P/E = 1 / (real int + (1-inflation flow) x ( inflation))
if the question states real, then use the real.
peace作者: bdavi77962 时间: 2011-7-13 14:55
How come sometimes we subtract inflation from nominal to get the real rate and sometimes we divide (1+ nominal) / (1 + inflation) = (1 + real)? Is subtracting just the approximation, if so would you ever get a question wrong for dividing?作者: neil1234 时间: 2011-7-13 14:55
@KSTHANE nailed it.
Also notice the lower the flow through rate the lower the P/E作者: economicz 时间: 2011-7-13 14:55
My question is when given the nominal rate and inflation do we always adjust for inflation by subtracting (the approximation)? In this case it is close 9% vs 8.91%, but would it ever make a difference between two answer choices on the test?作者: WarrenB1 时间: 2011-7-13 14:55
You want to use the real required rate of return, so just subtract out inflation. they do the same thing in derivatives where they use the linear approximation for currency appreciation/depreciation instead of using the exact calculation.
Inflation in US 5%
Inflation in UK 2%
thus you expect UK to appreciate by 3% even though the exact calc is
