(Difference between pages)
imported>Doug Williamson |
imported>P.F.cowdell@shu.ac.uk |
| Line 1: |
Line 1: |
| __TOC__
| | The fraction 1/r used when evaluating a fixed perpetuity. |
| | | Using this simple formula assumes a constant periodic cost of capital (r) for all periods from now to infinity. |
| | |
| == 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
| |
| | |
| | |
| == 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.
| |
|
| |
|
| | Sometimes known as the Perpetuity formula. |
|
| |
|
| == See also == | | == See also == |
| * [[Annuity]] | | * [[Annuity factor]] |
| * [[Dividend growth model]]
| | * [[Perpetuity]] |
| * [[Growing perpetuity]]
| |
| * [[Irredeemable]]
| |
| * [[Perpetuity due]] | |
| * [[Perpetuity factor]]
| |
| * [[Simple annuity]]
| |
| * [[Growing annuity]]
| |
|
| |
|
| [[Category:Corporate_finance]] | | [[Category:Business_Valuation]] |
| [[Category:Long_term_funding]]
| |
Revision as of 14:17, 12 August 2014
The fraction 1/r used when evaluating a fixed perpetuity.
Using this simple formula assumes a constant periodic cost of capital (r) for all periods from now to infinity.
Sometimes known as the Perpetuity formula.
See also
