Question

What is the present value of a perpetual stream of cash flows that pays ​$4500 at the end of year one and the annual cash flows grow at a rate of 4​% per year​ indefinitely, if the appropriate discount rate is 8​%? What if the appropriate discount rate is 6​%?

Answer 1

present value of a perpetual stream of cash flows = Cash flow / (cost of equity - growth rate)

At discount rate = 8%

present value of a perpetual stream of cash flows = 4500 / (8% - 4%)

                                                                                 = $ 112500

At discount rate = 6%

present value of a perpetual stream of cash flows = 4500 / (6% - 4%)

                                                                                 = $ 225000