Have been given a DCF model to do as part of an interview. They have said inflation is 2%pa into the forecast period.
Is this a trick? Should I be building this into my revenue/cost forecasts or should I not as the WACC already takes expected inflation into account? Confused how inflation affects a DCF in any way as have never modelled this in before.
Thanks
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WACC contemplates inflation. Cost of debt and cost of equity both reflect investors' inflation assumptions. So does the terminal multiple. So do (or should) the company's projected financials.
Only potential wrinkle is in the perp growth rate, if you're using that method. Might be an argument to juice that if you're assuming a secular increase in inflation.
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