There are to questions in CFAI curriculum where they use two drifferent denominators in divident discount model in terms of REITs terminal value calculation (reading 39), namely:
Can anyone explain why they used risk-free rate insted of growth rate?
it’s a mistake, it should be re-g for ddm
Are u sure? The same disount rate (re-rf) is used in schwesser notes in one example in this reading. Coincidence? I doubt it…
i thought it was in the cfai errata but it isn’t.
the schweser errata corrects both instances that they use re-rfr for the terminal value to re-g.
I’m slightly concerned that it isn’t in the cfai errata as i’m sure someone would have informed them. I still can’t think why you would use the required return minus the risk free rate though, it makes no sense.
EOC Question 4 also builds on the (re-g) in denominator: re = 8%, g=4% (for REIT C - dividend growth rate after year 3)