Project #21741 - Realistic example of why would inflation, risk free rate or risk premium rise using the TVM formula.

 

One method of looking at stock prices looks a future earnings discounted by the appropriate discount rate.  The discount rate depends upon the real rate of interest, inflation expectations and the risk premium for company's stock.

 

Present Value = Future Value / (1 + Required Rate of Return on company's equity)

 

Even if future earnings (or earnings per share - EPS) stay constant (the numerator), an increase in the risk free rate, the inflation rate, or the company's risk premium will cause the discount rate to rise and the present value to fall -- meaning the stock price should decline.  

Please provide a "realistic" EXAMPLE of how this might work and WHY IT MIGHT OCCUR (why would inflation, risk free rate or risk premium rise) using the TVM formula.

 

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Due By (Pacific Time) 01/30/2014 12:00 am
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