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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?
Productivity
A measure of the efficiency of production, often expressed as the ratio of output to input within a specific period.
Marginal Revenue Product
The additional revenue a firm generates from employing one more unit of input, such as labor or capital.
Productivity
An evaluation of how effectively a person, machine, factory, or system transforms inputs into valuable outputs.
Pure Rent
The return to any factor of production that is in fixed supply.
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