PLAC and Perpetuity: Difference between pages
imported>John Grout No edit summary |
imported>Doug Williamson (Added additional broader definition. Source http://www.investopedia.com/terms/p/perpetuity.asp.) |
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1. | |||
An infinite amount of time, usually a constant stream of cash flows with no end. | |||
2. '''Fixed perpetuities''' | |||
A fixed perpetuity is a periodic cash flow starting one period in the future, then carrying on for ever - ‘in perpetuity’. | |||
Each cash flow is an equal fixed amount. | |||
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 = A<sub>1</sub> x 1/r | |||
where: | |||
A<sub>1</sub> = Time 1 cash flow | |||
r = periodic cost of capital | |||
3. '''Growing perpetuities''' | |||
For a growing perpetuity, the present value formula is modified to take account of the constant periodic growth rate from one period in the future to infinity, as follows: | |||
Present Value = A<sub>1</sub> x 1 / (r - g) | |||
where g = the periodic rate of growth of the cash flow. | |||
The growing perpetuity concept is applied in many contexts. | |||
For example, the Dividend growth model for share valuation. | |||
*[[ | == See also == | ||
* [[Annuity]] | |||
* [[Dividend growth model]] | |||
* [[Growing perpetuity]] | |||
* [[Irredeemable]] | |||
* [[Perpetuity due]] | |||
* [[Perpetuity factor]] | |||
* [[Simple annuity]] | |||
* [[Growing annuity]] | |||
[[Category: | [[Category:Corporate_finance]] | ||
[[Category:Long_term_funding]] |
Revision as of 15:34, 16 August 2017
1.
An infinite amount of time, usually a constant stream of cash flows with no end.
2. Fixed perpetuities
A fixed perpetuity is a periodic cash flow starting one period in the future, then carrying on for ever - ‘in perpetuity’.
Each cash flow is an equal fixed amount.
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
where:
A1 = Time 1 cash flow
r = periodic cost of capital
3. Growing perpetuities
For a growing perpetuity, the present value formula is modified to take account of the constant periodic growth rate from one period in the future to infinity, as follows:
Present Value = A1 x 1 / (r - g)
where g = the periodic rate of growth of the cash flow.
The growing perpetuity concept is applied in many contexts.
For example, the Dividend growth model for share valuation.