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Inflation, Rational Valuation and the Market

Inflation, Rational Valuation and the Market MARCH/APRIL 1979 FAJ A. by Franco Modigliani and Richard Cohn Valuation Inflation, Rational and- the Market profits began a decline in * The ratio of market value to debt at the inflation rate; the funds obtained from the ever the late 1960s that has continued fairly steadily issues of debt needed to maintain leverage will precisely since. The reason is inflation, which causes investors to equal the funds necessary to pay interest on the debt two errors in evaluating common stocks. and maintain the firm's dividend and reinvestment commit major First, in inflationary periods, investors capitalize equity policies. rate, the S&P at the earnings at a rate that parallels the nominal interest Rationally valued, the level of 500 rather than the economically correct real rate-the end of 1977 should have been 200. Its actual value at nominal rate less the inflation premium. In the presence that time was 100. Because of inflation-induced errors, the cash return on have undervalued the stock of inflation, one properly compares investors systematically with stocks, not with the nominal return on bonds, but market by 50 per cent. O the real return on bonds. fail to allow for the gain to Second, investors real http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Financial Analyst Journal Taylor & Francis

Inflation, Rational Valuation and the Market

Financial Analyst Journal , Volume 35 (2): 21 – Mar 1, 1979

Inflation, Rational Valuation and the Market

Financial Analyst Journal , Volume 35 (2): 21 – Mar 1, 1979

Abstract

MARCH/APRIL 1979 FAJ A. by Franco Modigliani and Richard Cohn Valuation Inflation, Rational and- the Market profits began a decline in * The ratio of market value to debt at the inflation rate; the funds obtained from the ever the late 1960s that has continued fairly steadily issues of debt needed to maintain leverage will precisely since. The reason is inflation, which causes investors to equal the funds necessary to pay interest on the debt two errors in evaluating common stocks. and maintain the firm's dividend and reinvestment commit major First, in inflationary periods, investors capitalize equity policies. rate, the S&P at the earnings at a rate that parallels the nominal interest Rationally valued, the level of 500 rather than the economically correct real rate-the end of 1977 should have been 200. Its actual value at nominal rate less the inflation premium. In the presence that time was 100. Because of inflation-induced errors, the cash return on have undervalued the stock of inflation, one properly compares investors systematically with stocks, not with the nominal return on bonds, but market by 50 per cent. O the real return on bonds. fail to allow for the gain to Second, investors real

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Publisher
Taylor & Francis
Copyright
Copyright CFA Institute
ISSN
1938-3312
eISSN
0015-198X
DOI
10.2469/faj.v35.n2.24
Publisher site
See Article on Publisher Site

Abstract

MARCH/APRIL 1979 FAJ A. by Franco Modigliani and Richard Cohn Valuation Inflation, Rational and- the Market profits began a decline in * The ratio of market value to debt at the inflation rate; the funds obtained from the ever the late 1960s that has continued fairly steadily issues of debt needed to maintain leverage will precisely since. The reason is inflation, which causes investors to equal the funds necessary to pay interest on the debt two errors in evaluating common stocks. and maintain the firm's dividend and reinvestment commit major First, in inflationary periods, investors capitalize equity policies. rate, the S&P at the earnings at a rate that parallels the nominal interest Rationally valued, the level of 500 rather than the economically correct real rate-the end of 1977 should have been 200. Its actual value at nominal rate less the inflation premium. In the presence that time was 100. Because of inflation-induced errors, the cash return on have undervalued the stock of inflation, one properly compares investors systematically with stocks, not with the nominal return on bonds, but market by 50 per cent. O the real return on bonds. fail to allow for the gain to Second, investors real

Journal

Financial Analyst JournalTaylor & Francis

Published: Mar 1, 1979

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