Which of the following are true about inflation?
I.It depresses market valuations.
II.Investors tend to correctly perceive inflation.
III.It does not affect the cost of capital in real terms.
IV.It can affect the real-terms cash flows generated by companies.
A)I and II only.
B)I and IV only.
C)II and III only.
D)III and IV only.

Question

Quizplus · Accepted Answer

Statement I is true as inflation reduces the purchasing power of currency leading to a decrease in the value of assets and hence depressing market valuations. Statement IV is also true as inflation affects the real-terms cash flows generated by companies; for example, higher costs of raw materials and labor may decrease profit margins. Statement II is incorrect as investors may not always correctly perceive inflation. Statement III is incorrect as inflation affects the cost of capital in real terms as interest rates increase in response to inflation leading to an increase in the cost of borrowing.

Which of the Following Are True About Inflation