3.4. Perpetuities Flashcards
1
Q
Perpetuities…
A
An annuity where the cash flow lasts forever.
Used to forecast the value of long-term investments.
2
Q
Perpetuities equation…
A
PV(per) = cash flow / interest rate.
PV(per, due) = cash flow / interest rate * (1 + interest rate).
3
Q
A referred share pays £15 in dividends, expected to last forever.
The return on investment is 30%.
A
PV(per) = £15/0.30
=£50
4
Q
A perpetuity due pays £25 yearly with a required return on investment of just 5%.
A
PV(per, due) = £25 / 0.05 * (1.05) = £525
