Essay
Consider two companies based in a country with an inflation rate of 2%. There is no real growth in earnings. The real rate of return required by global investors for this type of stock investment is 5%.
a. Assume that the Company A can only pass 60% of inflation through its earnings. What should be its P/E using prospective earnings?
b. Assume that the Company B can pass the full inflation through its earnings. What should be its P/E using prospective earnings?
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