Mathematics for FinancePYQ 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 c — 1,250\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

Detailed Solution & Explanation

The present value (PV\displaystyle PV) of a growing perpetuity is: PV=Ar−gPV = \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=1000.12−0.04=1000.08=1,250PV = \frac{100}{0.12 - 0.04} = \frac{100}{0.08} = 1,250 Hence, **Option C** is the correct answer.

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