inflation flow through through

SkipE99

Seen many contradictions on this:

If required return = 10%
inflation = 1%
flow through = 100%

is the P/E 10 or 11?

random_walker47

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.

wizofoz

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.

OmarAdnan

Head in hands...



Edited 2 time(s). Last edit at Friday, May 27, 2011 at 05:45PM by Chuckrox8.

Rasec

This depends on your given required return. If it's real, P/E = 10. If it's nominal, P/E = 11.2*

lucasg85

Yep, r has to be real r. So if given nominal r, you must subtract inflation rate to get real r.

iteracom

The formula is

1/[(r-i)+(1-inflation flow through rate)*(inflation rate)]

So plugging the formula:

1/(.10-.01)+(0*.01)---->1/.09 = 11.11

bolligerallstar

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

bdavi77962

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?

neil1234

@KSTHANE nailed it.

Also notice the lower the flow through rate the lower the P/E