Omega, Inc., is based in Brazil, and most of its operations are domestic. During the period 1995-99,

Question:

Omega, Inc., is based in Brazil, and most of its operations are domestic. During the period 1995-99, the firm has not had any real growth in earnings. The annual inflation in Brazil during this period is given in the following table:
Year Inflation (%)
1995.............................22.0
1996............................. 9.1
1997............................. 4.3
1998............................. 2.5
1999............................. 8.4
The real rate of return required by global investors for investing in such as Omega, Inc., is 7 percent.
a. Compute the P/E for Omega in each of the years if it can completely pass inflation through its earnings.
b. Compute the P/E for Omega in each of the years if it can pass only 50 percent of inflation through its earnings.
c. What conclusion can you draw about the effect of inflation on the stock price? Stocks
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