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CFA Level I · CFA Level I Exam · Real Estate and Infrastructure

An analyst values an operating infrastructure asset expected to produce free cash flow to the firm of 12 million next year, growing at 3% a year indefinitely. The discount rate is 8%. The value of the asset is closest to:

The asset is worth about 240 million. Using the constant-growth model, value equals next year's cash flow of 12 million divided by the discount rate minus the growth rate, 8% minus 3%, which is 5%. Dividing 12 by 0.05 gives 240 million.

  1. A150 million
  2. B240 millionCorrect
  3. C400 million

Explanation

Gordon growth: value = 12 / (0.08 - 0.03) = 12 / 0.05 = 240 million. Option A (150) results from 12 / 0.08, ignoring growth. Option C (400) results from 12 / 0.03, dividing by the growth rate alone.

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