CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Mehta Ltd expects to pay a dividend of Rs 5 at the end of next year, growing at 4% per annum forever. If the required return is 14%, the present value of this growing perpetuity is:
The present value is Rs 50. For a growing perpetuity, divide next year's cash flow by the difference between the discount rate and growth rate: 5 divided by (14% minus 4%) equals 50.
- ARs 35.71
- BRs 52.00
- CRs 27.78
- DRs 50.00Correct
Explanation
PV = C1/(r-g) = 5/(0.14-0.04) = 5/0.10 = Rs 50. Rs 35.71 ignores growth (5/0.14). Rs 27.78 uses r+g (5/0.18).
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