Jason buys a consol (perpetual bond)that pays out a fixed cash flow of $750,000 every year,forever,starting at the end of this year.If the current market rate is 12.5%,what is the present value of the cash flows?
A)$6,000,000
B)$750,000
C)$843,750
D)$600,000
E)$7,500,000

Question

Quizplus · Accepted Answer

The present value of a perpetuity is calculated using the formula PV = C / r, where C is the annual cash flow and r is the discount rate. Here, C = $750,000 and r = 12.5% or 0.125. Thus, PV = $750,000 / 0.125 = $6,000,000.

Jason Buys a Consol (Perpetual Bond)that Pays Out a Fixed