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Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1?
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Question 13 A stock pays annually an amount of 10 from 6th year onward...
Solution:
Present Value of Perpetuity formula is:
PV = C / r
Where,
PV = Present Value
C = Cash Flow
r = Rate of Return
Given, cash flow (C) = 10
Rate of Return (r) = 20%
We need to find the present value of perpetuity from the 6th year onwards. So, we need to find the present value of the cash flows from year 6 to infinity.
We can use the formula for Present Value of Annuity to find the present value of the cash flows from year 6 to infinity.
Formula for Present Value of Annuity:
PV = A * (1 - (1 + r)^-n) / r
Where,
A = Cash flow per period
r = Rate of Return
n = Number of periods
We need to find the present value of the cash flows from year 6 to infinity. So, A = 10 and n = ∞ - 5 = ∞ (since the cash flows start from year 6).
Substituting the values in the formula, we get:
PV = 10 * (1 - (1 + 0.20)^-∞) / 0.20
We cannot directly calculate the present value of perpetuity using this formula, since the number of periods is infinite. We need to use the formula for Present Value of Perpetuity with a growth rate to solve this.
Formula for Present Value of Perpetuity with a growth rate:
PV = C / (r - g)
Where,
C = Cash Flow
r = Rate of Return
g = Growth Rate
Since the cash flows start from year 6, we need to find the present value of the cash flows from year 6 to infinity. So, the growth rate (g) is 0.
Substituting the values in the formula, we get:
PV = 10 / (0.20 - 0) = 50
Therefore, the present value of the perpetuity is 50.
Answer: (d) 22.1
Present Value of Perpetuity formula is:
PV = C / r
Where,
PV = Present Value
C = Cash Flow
r = Rate of Return
Given, cash flow (C) = 10
Rate of Return (r) = 20%
We need to find the present value of perpetuity from the 6th year onwards. So, we need to find the present value of the cash flows from year 6 to infinity.
We can use the formula for Present Value of Annuity to find the present value of the cash flows from year 6 to infinity.
Formula for Present Value of Annuity:
PV = A * (1 - (1 + r)^-n) / r
Where,
A = Cash flow per period
r = Rate of Return
n = Number of periods
We need to find the present value of the cash flows from year 6 to infinity. So, A = 10 and n = ∞ - 5 = ∞ (since the cash flows start from year 6).
Substituting the values in the formula, we get:
PV = 10 * (1 - (1 + 0.20)^-∞) / 0.20
We cannot directly calculate the present value of perpetuity using this formula, since the number of periods is infinite. We need to use the formula for Present Value of Perpetuity with a growth rate to solve this.
Formula for Present Value of Perpetuity with a growth rate:
PV = C / (r - g)
Where,
C = Cash Flow
r = Rate of Return
g = Growth Rate
Since the cash flows start from year 6, we need to find the present value of the cash flows from year 6 to infinity. So, the growth rate (g) is 0.
Substituting the values in the formula, we get:
PV = 10 / (0.20 - 0) = 50
Therefore, the present value of the perpetuity is 50.
Answer: (d) 22.1
Community Answer
Question 13 A stock pays annually an amount of 10 from 6th year onward...
22.1
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Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1?
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Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1?.
Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Question 13 A stock pays annually an amount of 10 from 6th year onwards. What is the present value of the perpetuity, if the rate of return is 20%? (a) 20.1 (b) 19.1 (c) 21.1 (d) 22.1?.
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