FF/GF- Use Real v. Nominal Required Return?? usually, required, question

himanshumh

On the sample question set, the 3 vingette asks to calc the franchise P/E and intrinsic P/E, the answer has it calc the required return (1/r) using the nominal return, why is this??

- i thought since maybe the forecast of earnings (pro-forma etc) are done usually on a nominal basis that the return should correspond, is this assumption valid?

kingstongal

No its always nominal. Real is used in the P/E ratio for value of the firm (the formula that has inflation flow through and inflation in the denominator).

Pegasus2008

the only place real return is used is when the inflation flow thro' portion (formula) is used. otherwise it is nominal cash flows at nominal discount rate.

CP