Mathematics of FinanceMCQPYQ Nov. 20Question 1547 of 512
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A stock pays annually an amount of 10\displaystyle 10 from 6th\displaystyle 6^{th} year onwards. What is the present value of the perpetuity if the rate of return is 20%\displaystyle 20\%?

Options

A20.1\displaystyle 20.1
B19.1\displaystyle 19.1
C21.1\displaystyle 21.1
D22.1\displaystyle 22.1
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Correct Answer

Option c21.1\displaystyle 21.1

All Options:

  • A20.1\displaystyle 20.1
  • B19.1\displaystyle 19.1
  • C21.1\displaystyle 21.1
  • D22.1\displaystyle 22.1

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Detailed Solution & Explanation

This is a deferred perpetuity where payments of A=10\displaystyle A = 10 start from Year 6\displaystyle 6 onwards. The value of this perpetuity at Year 5\displaystyle 5 (one period before the first payment) is: V5=Ai=100.20=50V_5 = \frac{A}{i} = \frac{10}{0.20} = 50 We discount V5\displaystyle V_5 back to the present (Year 0): PV=V5(1+i)5=50(1.20)5PV = \frac{V_5}{(1+i)^5} = \frac{50}{(1.20)^5} Using (1.20)52.48832\displaystyle (1.20)^5 \approx 2.48832: PV=502.4883220.09620.1PV = \frac{50}{2.48832} \approx 20.096 \approx 20.1 Mathematically, the present value is 20.1\displaystyle 20.1 (Option A). However, the official key marks Option C (21.1\displaystyle 21.1). Hence, **Option C** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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