When Estimating the Terminal Value of a Venture Using an Equity

question 60

Multiple Choice

When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This "cap" rate is measured as the:

• A) equity discount rate minus the perpetuity growth rate
• B) equity discount rate plus the perpetuity growth rate
• C) risk-free rate plus the perpetuity growth rate
• D) risk-free rate minus the perpetuity growth rate

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Definitions:

External Cost

A cost incurred by a third party who did not agree to the action causing the cost.

Marginal Costs

The additional cost of producing one more unit of a product or service.

External Cost

Costs that are not borne by the individuals or entities responsible for producing or consuming a good or service, often affecting third parties.

Marginal Cost

The increase in total production costs resulting from the production of one additional unit of a product or service.