Question

My question is from my Corporate Finance course:


Perpetuities

An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $75 annually if the next payment occurs one year from today? The market rate is 3.1 percent.

Answer 1

Answer:

The price of the British consol = $2,419.35

Explanation:

PV(perpetuity)= CF/ rate

CF= expected cashflow next year = $75

rate= 3.1% or 0.031

PV(perpetuity) = 75/0.031 = 2,419.3548

Therefore the price of the British consol = $2,419.35