Question

What is the present value of a growing perpetuity that makes a payment of $100 in the first year, which thereafter grows at 3% per year? Apply a discount rate of 7%.

A. $ 2,000
B. $ 3,500
C. $ 2,500
D. $ 4,000

Answer 1

C. $ 2,500

Step-by-step explanation:

Calculation for the present value

Using this formula

P0=D/(ke-g)

Where,

D=Dividend=$100

Ke=7%

g=3%

Let plug in the formula

P0=$100/(0.07-0.03)

P0=$100/0.04

P0=$2,500

Therefore the present value of a growing perpetuity will be $2,500