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Supposed you know that the discount rate applied to the expected cash flows of a company's...

Supposed you know that the discount rate applied to the expected cash flows of a company's security (e.g. stock) is 12%. You have also calculated its risk premium to be 5%. If the relevant real interest rate is 2% and you believe the market agrees with your calculation, this implies an (average) expected inflation rate of: answer is 5%. please show all work.

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Answer #1

The expected return = Risk Free rate + Risk Premium + Inflation
Inflation = 12%-5%-2% =5%

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