Union Bank of Switzerland (UBS) Interview Practice Test

The value hinges on valuing a perpetuity that grows, using the Gordon Growth Model: price equals next year's cash flow divided by the discount rate minus the growth rate. Here the cash flow next year is 200, growth is 4% (0.04), and the required return is 10% (0.10). So the price you’d pay is 200 / (0.10 − 0.04) = 200 / 0.06 ≈ 3,333.33. That matches the option of about 3,333.

If you see the other numbers pop up, they come from using different denominators that don’t reflect the growth correctly: for example, using the full 10% as the discount without subtracting growth yields 200 / 0.10 = 2,000; using 0.04 as the discount rate (ignoring the required return) would give 200 / 0.04 = 5,000; using a 0.05 spread would give 4,000. The correct approach subtracts the growth rate from the required return because the cash flows are expected to grow forever.