Interview Question: Gordon Growth to Determine Discount Rate
I have had an interview at another real estate firm and need to complete this DCF assignment for a speculative development project. They have given discount rates for the development and absorption phases, however, the description of final period discount rate is rather vague. I normally use WACC, but this implies that Gordon Model shall be used?
Periods 1-5: construction and absorption
Divested at end of Y5
CF starting Y6: USD 800
Growth rate: 1%
Terminal cap rate: 8%
''Assume CF from Y6 starts at USD 800 per year and grows annually at 1% per year. Assume that the client exits the project at the end of year 5 (when the project is fully leased) at a terminal cap rate of 8%.''
To me it, it seems that the right way to go here is:
value = CF / (discount rate - growth)
value = CF / cap rate
cap rate = discount rate - growth rate
discount rate = cap + growth
Therefore, the discount rate is 9 = 8 +1 ?
Aspernatur omnis tempora similique aliquid. Asperiores ea ut et iure. Aliquid reiciendis et sed ut sunt sit. Qui quia et suscipit quibusdam rerum architecto. Praesentium quis debitis quis recusandae ipsum illo et officia. Labore ad aliquid quia et quam praesentium.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...