Determine the value of a $500 Canadian Pacific Limited perpetual 8 percent debenture if the required rate of return is 14%:
To determine the value of a Canadian Pacific Limited perpetual 8 percent debenture, we need to use the present value formula. The present value (PV) of a perpetuity is calculated by dividing the annual payment (or coupon) by the required rate of return (r).
In this case, the annual payment is 8% of $500, which is $40. The required rate of return is 14%.
The formula for the present value of a perpetuity is:
PV = Annual Payment / Required Rate of Return
Substituting the values into the formula:
PV = $40 / 0.14
Using a calculator, we can determine the present value:
PV = $40 / 0.14 = $285.71
Therefore, the value of the $500 Canadian Pacific Limited perpetual 8 percent debenture, with a required rate of return of 14%, is $285.71.