Mathematics of FinanceMCQPYQ June 24Question 1561 of 512
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Assuming that the discount rate is 12%\displaystyle 12\% per annum, how much would you pay to get 100\displaystyle 100 per year, growing at 4%\displaystyle 4\% annually forever?

Options

A1,425\displaystyle 1,425
B1,300\displaystyle 1,300
C1,250\displaystyle 1,250
D1,150\displaystyle 1,150
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Correct Answer

Option c1,250\displaystyle 1,250

All Options:

  • A1,425\displaystyle 1,425
  • B1,300\displaystyle 1,300
  • C1,250\displaystyle 1,250
  • D1,150\displaystyle 1,150

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Detailed Solution & Explanation

The present value (PV\displaystyle PV) of a growing perpetuity is: PV=ArgPV = \frac{A}{r - g} Given: * First cash flow (A\displaystyle A) = 100\displaystyle 100 * Discount rate (r\displaystyle r) = 12%\displaystyle 12\% p.a. = 0.12\displaystyle 0.12 * Growth rate (g\displaystyle g) = 4%\displaystyle 4\% p.a. = 0.04\displaystyle 0.04 Substituting the values: PV=1000.120.04=1000.08=1,250PV = \frac{100}{0.12 - 0.04} = \frac{100}{0.08} = 1,250 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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