In path-breaking articles, Bradley and Jarrell develop an analysis that properly accounts for inflation in the context of constant growth valuation models. They show that many traditional applications of the constant growth model err by failing to properly account for the impact of inflation on the existing capital stock. Despite the publication of the Bradley and Jarrell papers, many leading valuation texts, including Damodaran and Koller, Goedhart, and Wessels, still employ variations of the traditional model, and a good deal of debate remains regarding the applicability of the Bradley-Jarrell approach. In that light, this short note offers a particularly simple and intuitive derivation of the Bradley-Jarrell results that makes it clear why the traditional models are in error when applied to actual or forecasted net operating profit after tax derived from GAAP-based financial statements or forecasts.
