Private Real Estate Reading 40 EOC Q#4 Volume 5 pg 75

CFA Level II Alternative Investments
#1

I am not able to understand terminal value calculation for DCF.

I believe terminal value in DCF should be calculated by using Discount rate - growth rate ( Discount rate given in question 7.25% - 2 % (growth rate which is calculated in Q#3)).

But solution is taking Terminal value calculated in Q#2 based on terminal cap rate.

Any explanation for this calculation?

#2

I haven’t gotten to this section, but the terminal value concept is mainly about valuing a perpetuity. So, the discount rate will simply move around based on what’s appropriate for the specific situation (e.g. cap rate for real estate and “r-g” for GGM). But ultimately, it’s just a discount rate being used to derive the value of the perpetuity.

#3

Think of the value in final year as a multiple rather than a terminal GGM. Sady, this is one of the areas you cannot import valuation methods from equity into alternatives.