Perpetuity: Difference between revisions
From ACT Wiki
Jump to navigationJump to search
imported>Administrator (CSV import) |
imported>Doug Williamson m (Spacing 21/8/13) |
||
| Line 1: | Line 1: | ||
1. | 1. | ||
A perpetuity is similar to an annuity except that the fixed periodic cash flow which starts at the future Time 1 then carries on for ever (‘in perpetuity’) rather than stopping after Time n. | A perpetuity is similar to an annuity except that the fixed periodic cash flow which starts at the future Time 1 then carries on for ever (‘in perpetuity’) rather than stopping after Time n. | ||
| Line 5: | Line 6: | ||
Present Value = A<sub>1</sub> x 1/r | Present Value = A<sub>1</sub> x 1/r | ||
2. | 2. | ||
For a growing perpetuity the present value formula is modified to take account of the constant periodic growth rate from Time 1 to infinity as: | For a growing perpetuity the present value formula is modified to take account of the constant periodic growth rate from Time 1 to infinity as: | ||
| Line 14: | Line 17: | ||
The growing perpetuity concept is applied by the Dividend growth model for share valuation. | The growing perpetuity concept is applied by the Dividend growth model for share valuation. | ||
== See also == | == See also == | ||
| Line 22: | Line 26: | ||
* [[Perpetuity factor]] | * [[Perpetuity factor]] | ||
* [[Simple annuity]] | * [[Simple annuity]] | ||
Revision as of 13:36, 21 August 2013
1.
A perpetuity is similar to an annuity except that the fixed periodic cash flow which starts at the future Time 1 then carries on for ever (‘in perpetuity’) rather than stopping after Time n.
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 from Time 1 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.
