Hi, everyone. I'd like to ask you a question concerning the calculation of inflation.

Assume I have a company with 3 segments

The segment growth rates in real terms:
Segment 1, 2.7%
Segment 2, 6.0%
Segment 3, 14.5%

If the size of the segments is equal, the company should grow by 2.7% + 6.0% + 14.5% = 23.2% in real terms.

If inflation is 2.5%, I'd calculate nominal growth as 1.232 * 1.025 = 1.2628 -> 26.28% which is the necessary growth rate to offset inflation.

However, if I use another approach and adjust for inflation on a segment level I get a different result.

Segment growth rates in nominal terms:
Segment 1, (1+2.7%)(1+2.5%) -1 = 5.267%
Segment 2, (1+6.0%)
(1+2.5%) -1 = 8.65%
Segment 3, (1+14.5%)*(1+2.5%) -1 = 17.362%

So which is the correct nominal growth rate, 26.28% or 31.279%?

Could anyone of you tell me which approach I should use to account for inflation properly?
Thanks a lot.

#### WSO Elite Modeling Package

• 6 courses to mastery: Excel, Financial Statement, LBO, M&A, Valuation and DCF
• Elite instructors from top BB investment banks and private equity megafunds
• Includes Company DB + Video Library Access (1 year)