   Chapter 5, Problem 16P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PRESENT VALUE OF A PERPETUITY What is the present value of a $100 perpetuity if the interest rate is 7%? If interest rates doubled to 14%, what would its present value be? Summary Introduction To compute: Present value of$100 perpetuity, if the interest rate is 7% and 14%.

Perpetuity: It is a vital concept of corporate finance; it is that annuity, which has regular payment started on particular date and continues for indefinite period of time. It is important as it help in value of stocks, real state and other opportunities of investment.

Explanation

Solution:

Formula to calculate present value of perpetuity is,

PVPerpetuity=PMTi (I)

Here,

• PV is present value.
• PMT is perpetuity payment.
• i is interest rate.

Substitute $100 for PMT 7% for i in equation (I). PV=$1000

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