An investment will pay you $500 annually forever. The required rate of return for this investment...
An investment will pay you $500 annually forever. The required rate of return for this investment is 6%. If the current price of this investment is $8,250, you should accept this investment.
True or False?
Homework Answers
Fair Price = Cash Flow / Required Return
= $ 500/6%
= $ 8,333.33
Current Price = $ 8,250
Since the Current Price is less than the Fair Price, this means that the investment is under valued and hence it must be accepted.
Answer = True.
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