What does 'g' represent in the formula for calculating the market discount rate?

In the context of the formula for calculating the market discount rate, 'g' represents the constant growth rate. This growth rate is an essential component in various financial models, particularly in the Gordon Growth Model (also known as the Dividend Discount Model), where it reflects the expected perpetual growth rate of cash flows, dividends, or earnings for an investment.

The constant growth rate is crucial for determining the present value of future cash flows when assessing investments. It provides insight into how much the expected returns from an asset may grow over time. In scenarios where one is evaluating the long-term performance or potential return on investment, understanding and estimating 'g' accurately is vital for arriving at a realistic market discount rate.

This concept contrasts with other financial terms mentioned in the options. The risk-free rate refers to the theoretical return on an investment with zero risk, often associated with government bonds. The hurdle rate typically denotes the minimum acceptable return on an investment, while cap rate (capitalization rate) is used primarily in real estate to indicate the expected rate of return on a property based on income. Each of these has a different role in financial analysis compared to the growth rate 'g.'