Series 79 practice questioneasyValuation Methods
In a DCF, final-year unlevered free cash flow is $40 million, the perpetual growth rate is 2%, and WACC is 8%. Which expression is used to calculate terminal value under the Gordon Growth method?
- A$40 million ÷ WACC
- B$40 million × WACC ÷ g
- C$40 million × (1 + g) ÷ (WACC - g)✓ Correct answer
- D$40 million × (WACC - g)
Explanation
Why C — $40 million × (1 + g) ÷ (WACC - g)
$40 million × (1 + g) ÷ (WACC - g) The Gordon Growth formula capitalizes next-period cash flow by the spread between discount rate and growth rate. That is the standard perpetuity approach used in DCF work when long-term growth is assumed to continue indefinitely.
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