I’m really thrown off by this answer if anyone has access to their B Mock PM Session. Vignette 8 Question 5 on Alts:
The growth rate during the investment holding period that Florian would use in a discounted cash flow model to value Property 1, based on the information in Exhibit 1, will be closest to:
Exhibit 1 Relevant Info:
Going-in Cap rate 4.5%
Terminal cap rate 5.5%
Required Return 9.5%
Here is their answer:
Florian states the DCF assumptions are based on income and property value growing at a constant rate. The going‐in capitalization (cap) rate is the required return less the growth rate:
Cap rate = r - g
9.5% - g = 5%
g = 4.5%
So why are they using 5 as the cap rate? Are they averaging the two? It specifies the going-in rate in the answer, so I had 4.5% = 9.5% - g, so g is 5 from what I did.
9.Cap rate9.5%−gg===r−g5.0%4.5%