Question

3. consider a growing perpetuity that will pay $100 in one each year after that, you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment. this pattern of payments will continue forever. if the interest rate is 11%, then the value of this perpetuity is closest to:

Answer 1

The value of the perpetuity will be $29,411 considering the value of cash flow and growth rate.

Calculation:

Cash flow of perpetuity = $100

Interest rate (r) = 0.11

last dividend = 11%*100 = $11

Growth rate (g) = $11.66-11/11 = 10.66

Value of perpetuity = Cash flow/r-g

Value of perpetuity = 100/0.11-0.1066= $29,411

A perpetuity is a type of investment that pays forever. In the world of finance, perpetuity refers to an endless succession of identical financial flows. A stream of monetary flow is an annuity. A perpetuity is a kind of annuity that is perpetual, lasting eternally. An endless amount of time passes while the flow of cash flows continuously. In order to determine the current value of a firm's cash flows when depreciated back at a specific rate, one utilizes the perpetuity calculation for valuation approaches.

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