In the schweser notes they state to calculate the leading P/E ratio with inflation flow through rates as: P0/E1 = 1 / real required return + [1 - inflation flow through rate) * inflation rate How does this calculation differ from the intrinsic P/E which is 1 / r + (FF * G)? Is it possible the exam would give us a quesiton where we calculate intrinsic P/E with an inflation pass through rate? I understand that 1/r assumes required return on equity which I believe incorporates inflation, but the inflation passthrough equation does not incorporate the use of franchise P/E.
Those are two completely different calculations! One is to calculate the inflation effect on P/E, and the other one calculates the “true” P/E considering the growth prospects and franchise value of a company. Lastly, please do consider reviewing the way formulas are written.
what reading is this from? just curious, haven’t seen it yet and more than 1/2 way through equity analysis.
It is probably in the latter half of the equity valuation book.
I am pretty sure it is in the “Returns” chapter…
found it thanks, i had skipped over study session 11 and jumped to 12…
jackofalltrades Wrote: ------------------------------------------------------- > Those are two completely different calculations! > One is to calculate the inflation effect on P/E, > and the other one calculates the “true” P/E > considering the growth prospects and franchise > value of a company. > > Lastly, please do consider reviewing the way > formulas are written. +1