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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PRESENT VALUE OF A PERPETUITY What is the present value of a $600 perpetuity if the interest rate is 5%? If interest rates doubled to 10%, what would its present value be?

Summary Introduction

To compute: Present value of $600 perpetuity if the interest rate is 5% and 10%

Introduction:

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 helps in value of stocks, real state, and other opportunities of investment.

Explanation

Given,

Annuity is $600.

Interest rate is 5%.

Formula to calculate present value of perpetuity,

PVPerpetuity=PMTi

Here,

  • PV stands for present value
  • PMT stands for perpetuity payment
  • I stands for interest rate

Substitute $600 for PMT and 5% for i.

PV=$6000

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