Mathematics of FinanceMCQPYQ Sep 24Question 1564 of 512
All Questions

A Perpetuity has a cash flow of 625\displaystyle 625 and a required rate of return of 8%\displaystyle 8\%. If the cash flow is expected to grow at a constant rate of 4%\displaystyle 4\% per year, then the intrinsic value of this perpetuity (present value of growing perpetuity) is:

Options

A15,000\displaystyle 15,000
B15,625\displaystyle 15,625
C14,280\displaystyle 14,280
D16,667\displaystyle 16,667
For any discrepancies in this question, email contact@cadada.in

Correct Answer

Option b15,625\displaystyle 15,625

All Options:

  • A15,000\displaystyle 15,000
  • B15,625\displaystyle 15,625
  • C14,280\displaystyle 14,280
  • D16,667\displaystyle 16,667

Ad

Detailed Solution & Explanation

The present value (PV\displaystyle PV) of a growing perpetuity is: PV=ArgPV = \frac{A}{r - g} Given: * Cash flow (A\displaystyle A) = 625\displaystyle 625 * Required rate of return (r\displaystyle r) = 8%\displaystyle 8\% p.a. = 0.08\displaystyle 0.08 * Growth rate (g\displaystyle g) = 4%\displaystyle 4\% p.a. = 0.04\displaystyle 0.04 Substituting the values: PV=6250.080.04=6250.04=15,625PV = \frac{625}{0.08 - 0.04} = \frac{625}{0.04} = 15,625 Hence, **Option B** 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

Exam Strategy Tip

Guaranteed 12-16 marks. Master your calculator! Learn the 'GT' and compound interest M+/M- tricks to solve annuity questions in 10 seconds without writing long formulas.

Related Comparison Tables

More Questions from Mathematics of Finance

Ready to Master Mathematics of Finance?

Practice all 512 questions with instant feedback, earn XP, track your streaks, and ace your CA Foundation exam.

Start Practicing — It's Free