Faculty Scholarship 1994 - Present

Inflation and the Market Value of the Firm

Although the effect of inflation on the required rate of return is discussed exclusively in corporate finance textbooks, its effect on the firm's cash flows and market value through understated historical depreciation and inventory costs is not sufficiently covered. In this paper, we present two simple examples which can be used in the classroom to help students understand how the understatement of depreciation and inventory costs during periods of inflation lowers the real cash flows and the market value of the firm.