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:

Unit Cost

The cost incurred to produce, acquire, or distribute one unit of a product or service.

Inventoriable Costs

Costs that are included in the value of inventory and recognized as cost of goods sold when the inventory is sold.

Cost of Goods

The immediate expenses incurred in the production of a company's sold goods, covering both the cost of labor and materials used.

Consigned Goods

Goods that are given to a third party to sell, but ownership remains with the supplier until sold.