Offer price and Perpetuity: Difference between pages
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1. | |||
A perpetuity is similar to an annuity except that the fixed periodic cash flow which starts at the future Time 1 period hence 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 = A<sub>1</sub> 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 period hence to infinity as: | |||
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 by the Dividend growth model for share valuation. | |||
== See also == | == See also == | ||
* [[ | * [[Annuity]] | ||
* [[ | * [[Dividend growth model]] | ||
* [[ | * [[Growing perpetuity]] | ||
* [[ | * [[Perpetuity due]] | ||
* [[ | * [[Perpetuity factor]] | ||
* [[ | * [[Simple annuity]] | ||
[[Category:Debt_Capital_Markets]] | |||
[[Category:Business_Valuation]] | |||
[[Category:Investment_Appraisal]] | |||
Revision as of 19:52, 17 August 2014
1.
A perpetuity is similar to an annuity except that the fixed periodic cash flow which starts at the future Time 1 period hence 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 period hence 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.
