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Unformatted text preview: ties, with issuer paying a constant dividend to holders • Equation for present value of a perpetuity can be derived from present value of an annuity equation with n tending to infinity: • Perpetuities PVA∞ = CF × Present value factor for annuity 1 1 − (1 + i )∞ (1 − 0 ) = CF × = CF × i i = CF i Becky Scholes has $150 000 to invest. She wants to be able to withdraw $12500 every year forever without using up any of her principal. What interest rate would her investment have to earn in order for her to be able to so? Solution: Calculate the perpetuity payments for the following case: $250000 invested at 6 per cent. Solution: Annual payment = CF Investment rate of return = i = 6% Term of payment = Perpetuity Present value of investment needed = PVA∞ = $250000 • Cash flows that grow at a In addition to constant rate flow streams, constant cash one may have to deal with cash flows that grow at constant rate over time • These cash-flow streams called growing annuities or growing perpetuities Cash flows that grow at a Growing annuity constant rate • Business may need to calculate value of multiyear product or service contracts with cash flows that increase each year at constant rate – These are called growing annuities. • Example of growing annuity: valuation of growing business whose cash flows increase every year a...
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This document was uploaded on 03/27/2014.

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