The Present Value of an Infinite Stream of Payments (X)

question 71

Multiple Choice

The present value of an infinite stream of payments (X) at an interest rate of r% (r^*) is calculated as:

• A) X - r^*.
• B) X + r^*.
• C) X × r^*.
• D) X ÷ r^*.

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Definitions:

Compensating Balances

Minimum cash balances that a business agrees to maintain in its account as part of a loan agreement, often used to reduce the lender's risk.

Pledging Agreement

An agreement where a borrower pledges an asset as collateral to secure a loan, ensuring the lender can seize the asset if the loan defaults.

Warehousing

In finance, a method of securing the lender’s interest when borrowing is secured by inventories. The inventory is placed in a warehouse operated by a third party. When it is drawn out of the warehouse by the borrower, a pro rata share of payment on the loan is due.

Legal Control

The power or authority to direct the management and policies of a company or organization, typically through ownership of voting shares or by contract.