The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

8. Macro Matters: The Real Economy

Companies operate in a larger economy, and the assumptions we make about macroeconomic variables affect the valuations of all companies. This chapter begins by looking at how changes in the real economy, inflation, and exchange rates affect valuation. It also looks at the historical behavior of each of these variables. We then consider how analysts deal with macroeconomic variables in valuation. They often make implicit assumptions about growth and inflation that may be unrealistic or explicit assumptions that are internally inconsistent. We evaluate whether we should be building in views on the macroeconomic variables and, if so, how best to do this.