The terminal value in a DCF is usually estimated by:
Correct Answer
C) Capitalizing the year after the holding period at an exit rate
Why this is correct: The terminal (or reversion) value in a DCF represents the estimated sale price at the end of the holding period. It is typically estimated by capitalizing the projected net operating income for the first year after the holding period using an appropriate exit capitalization rate. Why the other choices are wrong: Applying the going-in rate to first-year income estimates present value, not terminal value. Using original price plus inflation is not a market-based method. Assuming a zero value is unrealistic for most properties. Exam tip: Terminal Value = (Projected NOI at end of holding period + 1) / Exit Cap Rate.
Why This Is the Correct Answer
Why this is correct: The terminal (or reversion) value in a DCF represents the estimated sale price at the end of the holding period. It is typically estimated by capitalizing the projected net operating income for the first year after the holding period using an appropriate exit capitalization rate. Why the other choices are wrong: Applying the going-in rate to first-year income estimates present value, not terminal value. Using original price plus inflation is not a market-based method. Assuming a zero value is unrealistic for most properties. Exam tip: Terminal Value = (Projected NOI at end of holding period + 1) / Exit Cap Rate.
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