Perpetuity and Perpetuity factor: Difference between pages

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(Remove excessive referencing of annuities.)
 
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===== Fixed perpetuities =====
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.
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]]
* [[Perpetuity due]]
* [[Perpetuity factor]]
* [[Simple annuity]]


[[Category:Corporate_finance]]
[[Category:Long_term_funding]]

Revision as of 14:20, 23 October 2012

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