Perpetuity Pricing: CFA Level 1 Exam Question Answered

A

If r is the discount rate, then 40,000 = 5,000/r, giving r = 12.5%

To calculate the annual discount rate for a perpetuity, we can use the formula:

Discount rate = Annual payment / Price

In this case, the perpetuity is priced at $40,000 and the annual payment is $5,000. Plugging these values into the formula, we get:

Discount rate = $5,000 / $40,000

Simplifying the expression, we have:

Discount rate = 0.125

Converting this decimal to a percentage, we find that the discount rate is 12.5%.

Therefore, the correct answer is option A: 12.5%.