🏦LTB
← Series 79: Collection, Analysis & Evaluation of Data
Series 79 practice questionmediumTerminal Value Calculation

If an analyst uses a perpetuity growth rate of 5% in the terminal value calculation for a US-based company, what concern should a senior banker raise?

  1. AThe growth rate is too low to capture the company's potential
  2. BThe perpetuity growth rate must always be zero
  3. CThe growth rate should match the company's historical revenue CAGR
  4. DA 5% perpetuity growth rate exceeds long-term nominal GDP growth and implies the company will eventually become larger than the entire economy, which is unrealistic✓ Correct answer
Explanation

Why D — A 5% perpetuity growth rate exceeds long-term nominal GDP growth and implies the company will eventually become larger than the entire economy, which is unrealistic

A perpetuity growth rate of 5% is generally considered too high for a terminal value calculation because it exceeds the long-term nominal GDP growth rate of the US (typically assumed at 2-3%). Using a growth rate above GDP implies the company will continuously gain market share indefinitely and eventually become larger than the entire economy, which is mathematically impossible. Standard practice is to use a terminal growth rate between 2-3% for US companies, roughly in line with expected long-term nominal GDP growth.

Turn it into reps

Reading one answer is not the same as being ready

Lucky the Banker is a free practice app with 477+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.

Practice Series 79 freeSeries 79 exam guide
Related Collection, Analysis & Evaluation of Data questions