Anyone know the formula for inflation flow-through?
1/(rr+(1-Lambda)*I) Lambda = Inflation Flow thro’ rate I=Inflation Rate rr=Real rate Do you not have your books with you? If you do not have the formula in your mind by now, what are you doing without your books?
I feel like that formula is a hit or a miss on the exam, and would only be asked once if at all. Basically just tying up loose ends. Thanks.
easiest way to think of it is the percent inflation that you have to add to your required rate of return. Inflation is 5%. pass through is 40%… means you’re hit with 60%. 60% of 5% is 3% If required rate of return is 8%… now it’s 8% + 3% P/E without inflation = 1/.05 P/E with inflation = 1/.08 Your P/E goes down. Just be aware of whether or not the require rate of return if in nominal or real terms. It has to be in real terms. If it’s in nominal terms, then inflation is already included… and you need to back it out (sample exam issue).
very helpful mcf thanks.