Question
In: Finance
What is the present value of a perpetual stream of cash flows that pays $5 comma...
What is the present value of a perpetual stream of cash flows that pays $5 comma 500 at the end of year one and the annual cash flows grow at a rate of 3% per year indefinitely, if the appropriate discount rate is 14%? What if the appropriate discount rate is 12%?
a.If the appropriate discount rate is 14%, the present value of the growing perpetuity is $_____. (Round to the nearest cent.)
b.If the appropriate discount rate is 12%, the present value of the growing perpetuity is $ _____. (Round to the nearest cent.)
Solutions
Expert Solution
Present value of perpetuity=Cash flow for year 1/(Discount rate-Growth rate)
1.Present value=5500/(0.14-0.03)
which is equal to=$50,000
2.Present value=5500/(0.12-0.03)
which is equal to=$61,111.11(Approx).
jeff jeffy answered 1 year agoRelated Solutions
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