CS Executive · Corporate Accounting and Financial Management · Security Analysis
A perpetual debenture pays an annual interest of ₹80. Investors require a return of 10%. If the required return rises to 16%, by what amount does the value of the debenture fall?
The value falls by ₹300. A perpetual debenture is valued as interest divided by required return: ₹80 at 10% gives ₹800, and ₹80 at 16% gives ₹500, so the decline is ₹800 minus ₹500, which is ₹300.
- A₹200
- B₹300Correct
- C₹500
- D₹800
Explanation
Value of perpetuity = interest / required return. At 10%: 80/0.10 = ₹800. At 16%: 80/0.16 = ₹500. Fall = ₹300. ₹500 is the new value, not the fall.
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