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What constraint applies to the perpetuity growth rate in a terminal value calculation?

  1. A It should not exceed long-run economic or inflation growth
  2. B It should exceed the discount rate
  3. C It must equal the historical growth rate
  4. D It must be zero
Answer

It should not exceed long-run economic or inflation growth

A growth rate above the discount rate produces a mathematically infinite value, and one above GDP growth implies the firm eventually becomes the economy.

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