Perpetuity: Difference between revisions
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imported>P.F.cowdell@shu.ac.uk m (Categorise the page) |
imported>Doug Williamson (Slight rewording to make description clearer) |
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A perpetuity is similar to an annuity except that the fixed periodic cash flow | A perpetuity is similar to an annuity except that the fixed periodic cash flow starting one period into the future then carries on for ever (‘in perpetuity’) rather than stopping at a future point. | ||
The present value of a fixed perpetuity is calculated - assuming a constant periodic cost of capital (r) for all periods from now to infinity - as: | The present value of a fixed perpetuity is calculated - assuming a constant periodic cost of capital (r) for all periods from now to infinity - as: | ||
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2. | 2. | ||
For a growing perpetuity the present value formula is modified to take account of the constant periodic growth rate from | For a growing perpetuity the present value formula is modified to take account of the constant periodic growth rate starting from one period into the future to infinity as: | ||
Present Value = A<sub>1</sub> x 1/[r-g] | Present Value = A<sub>1</sub> x 1/[r-g] | ||
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* [[Simple annuity]] | * [[Simple annuity]] | ||
[[Category:Corporate_finance]] | |||
[[Category:Long_term_funding]] | [[Category:Long_term_funding]] | ||
Revision as of 15:52, 30 May 2015
1.
A perpetuity is similar to an annuity except that the fixed periodic cash flow starting one period into the future then carries on for ever (‘in perpetuity’) rather than stopping at a future point.
The present value of a fixed perpetuity is calculated - assuming a constant periodic cost of capital (r) for all periods from now to infinity - as:
Present Value = A1 x 1/r
2.
For a growing perpetuity the present value formula is modified to take account of the constant periodic growth rate starting from one period into the future to infinity as:
Present Value = A1 x 1/[r-g]
where g = the periodic rate of growth of the cash flow.
The growing perpetuity concept is applied by the Dividend growth model for share valuation.
