Equity Valuation's rate of interest VS Required rate of return

[indexo]

Hi,

I am confused.
Is the equity valuation's i the same as required rate of return?
In the textbook,
under equity valuation, 'i' used to value equity = long term gov yield + equity risk premium
under required rate of return, = risk free real rate of return + expected inflation + equity risk premium.

Are they different? And if so why?
If they are equal, where did the expected inflation go under equity valuation?

Appreciate your help.

Thanks,
indexo

 

[Mark Willder]

Hi,

I am confused.
Is the equity valuation's i the same as required rate of return?
In the textbook,
under equity valuation, 'i' used to value equity = long term gov yield + equity risk premium
under required rate of return, = risk free real rate of return + expected inflation + equity risk premium.

Are they different? And if so why?
If they are equal, where did the expected inflation go under equity valuation?

Appreciate your help.

Thanks,
indexo

The choice of the valuation interest rate assumption will depend on the purpose of the valuation, eg do we want a prudent valuation, do we want to be consistent with the valuation of the liabilities?

However, if I was valuing an equity to decide whether I thought it was a good investment, then yes I would discount the dividends at my required rate of return.

We could take the risk free rate of return to be the government bond yield. We can then split this yield into the real yield and the expected inflation. So yes, the two equations you quote are the same.

I hope this clarifies things.

Best wishes

Mark