The Role of Inflation in Business Valuations: Nominal Cash Flows and the Discount Rate
In bedrijfswaarderingen, met name bij het gebruik van methoden zoals de Adjusted Present Value (APV), is het essentieel om te begrijpen hoe inflatie wordt verwerkt in de waarderingsprocessen. Een belangrijke vraag is of inflatie apart moet worden meegenomen in de berekeningen. Het antwoord is dat als je werkt met nominale cashflows en een nominale verdisconteringsvoet, inflatie al inbegrepen is. In dit artikel bespreek ik waarom dit zo is en waarom inflatie niet apart elders in de berekening hoeft te worden meegenomen.
What are Nominal Cash Flows and the Nominal Discount Rate?
Nominal Cash Flows
Nominal cash flows are the expected future cash flows that have not been adjusted for inflation. This means these cash flows account for expected price increases and cost increases due to inflation. For example, if a company expects inflation to be 2% annually, the nominal cash flows in future years will be higher than current cash flows, as they reflect the expected price increases due to inflation.
Nominal Discount Rate
The nominal discount rate is the percentage used to calculate the present value of nominal cash flows. This discount rate consists of multiple components:
- Risk-free return: This is the return on a risk-free investment, such as government bonds. It serves as the basis for the discount rate.
- Illiquidity premium: A premium added to compensate for the risk that the investment is not easily tradable.
- Market risk premium: An additional return that investors demand for bearing market risks above the risk-free return.
- Small Firm Premium: A premium that reflects the higher risk associated with investing in smaller companies.
These components together form the nominal discount rate, which encompasses all relevant risks and expectations regarding the time value of money and inflation.
Why Inflation Doesn’t Need to be Included Separately
When you use both nominal cash flows and a nominal discount rate, inflation is already incorporated in both. The future cash flows are based on prices and costs that are expected to increase due to inflation. Simultaneously, the nominal discount rate accounts for the time value of money and expected inflation.
The Risk of Double Counting
It’s important to realize that if you were to include inflation separately in a situation where you’re using nominal cash flows and a nominal discount rate, you risk double counting inflation. This would lead to an undervaluation of the company because you would be discounting future cash flows too heavily.
Consistency in Valuations: Nominal versus Real
A crucial point in valuations is consistency. If you use nominal cash flows, you must apply a nominal discount rate. Conversely, if you use real cash flows (where inflation has been filtered out), you must also use a real discount rate, without an inflation component. This consistency prevents errors and ensures an accurate and reliable valuation.
Conclusion
The inflation of free cash flows is already included in both the cash flows and the discount rate when using nominal terms. Therefore, you don’t need to include inflation separately elsewhere in the calculation. Understanding this dynamic is essential for performing accurate business valuations. By consistently discounting nominal cash flows with a nominal discount rate, you avoid the risk of double counting and arrive at a correct valuation of the company.