Question

5. What is the present value of a perpetuity of $10 per year if the first payment will be received one year from now and the appropriate interest rate is 8 percent per year? a. $0.80 b. $1.25 c. $12.50 d. $125.00 6. Continuing the previous problem, what is the present value of this perpetuity if the first payment of $10 per year will not be received until five years from now, assuming that subsequent $10 payments will still occur once a year thereafter? a. $81.20 b. $85.07 c. $91.88 d. $97.23

Answer 1

Explanation:

It is the estimate of cash flows in year 10 of the company, multiplied by one plus the company's long-term growth rate, and then divided by the difference between the cost of capital and the growth rate.