You Have a Chance to Purchase a Perpetual Security That

question 90

Multiple Choice

You have a chance to purchase a perpetual security that has a stated annual payment (cash flow) of $50.However,this is an unusual security in that the payment will increase at an annual rate of 5 percent per year;this increase is designed to help you keep up with inflation.The next payment to be received (your first payment,due in 1 year) will be $52.50.If your required rate of return is 15 percent,how much should you be willing to pay for this security?

• A) $350
• B) $482
• C) $525
• D) $556
• E) $610

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Definitions:

Sales Budget

A detailed plan that estimates future sales, usually expressed in both units and dollars, for a specific period.

Raw Material Purchases

The acquisition of the basic materials and components required for the production of goods.

Budgeted Sales

Projected sales revenue a company plans to achieve in a future period, often used for planning and performance evaluation.

Credit Sales

Sales for which payment is not received at the time of the transaction but is expected to be received at a later date.