Interview Question: Gordon Growth to Determine Discount Rate

I have had an interview at another real estate firm and need to complete this DCF assignment for a speculative development project. They have given discount rates for the development and absorption phases, however, the description of final period discount rate is rather vague. I normally use WACC, but this implies that Gordon Model shall be used?

Periods 1-5: construction and absorption
Divested at end of Y5
CF starting Y6: USD 800
Growth rate: 1%
Terminal cap rate: 8%

''Assume CF from Y6 starts at USD 800 per year and grows annually at 1% per year. Assume that the client exits the project at the end of year 5 (when the project is fully leased) at a terminal cap rate of 8%.''

To me it, it seems that the right way to go here is:

value = CF / (discount rate - growth)
value = CF / cap rate
cap rate = discount rate - growth rate
discount rate = cap + growth

Therefore, the discount rate is 9 = 8 +1 ?

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Dec 7, 2017