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Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212851  
Subject: Re: Influence on ROE in Investing returns Date: 10/10/2012 6:27 PM
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No.
You don't have to do an inflation adjustment on an instantaneous earnings-related rate


Jim,

The thinking behind my inflation adjustment was to related to WACC.

The ideal being.

Target ROE = WACC + some margin.

For WACC, I was reading from your post # 194745 where you said.

That should provide a good sanity check, since the cap-weighted average of
the WACCs you estimate should come close to Siegel's constant for the US
.
That's again contrary to theory, as most MBAs will come up with much
higher WACCs than 6.5% above inflation.


I inferred from the above that:
* when you suggested Siegel's constant as a sanity check
* and Siegel's constant happens to be 6.5%
* and you then made reference to WACC's 6.5% above inflation

that you meant a sanity check on WACC would be Siegels constant + inflation.

This led me to the WACC of 10% and a target ROE of 15% with a 5% margin.

Perhaps I misunderstood.

StevnFool
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