Adventis Financial Modeling Certification (FMC) Level 2 Practice Test

The option that states the perpetuity growth rate cannot exceed the local inflation rate because it would signify that the company could outgrow the economy is correct. This is based on the understanding of economic growth and inflation dynamics.

If a company's growth rate consistently exceeds the local inflation rate, it suggests that the company has the potential to generate returns that outpace the overall economic growth. This scenario raises concerns about sustainability. An ever-growing company may exhaust market demand or resources, leading to potential imbalances in pricing or supply. In essence, if a company's growth continues unchecked in relation to the economy, it poses questions about its future viability and the feasibility of such growth in the long term. A perpetuity growth rate above inflation implies a scenario where the company's revenues and profits are growing at an unsustainable pace compared to the economy, which is typically not realistic or sustainable over time.

This relationship highlights the importance of aligning business growth with the broader economic context to ensure sustainable operations and profitability.