- This topic has 1 reply, 2 voices, and was last updated 10 years ago by
.
- Posts
A company will recieve perpetuity starting in 2 years time of $10000 per annum,increasing by the rate of inflation which is 2%.
what is the present value of this perpetuity assuming a money cost of capital of 10.2%?
The real rate = (1.102/1.02) – 1 = 0.080392 (or 8.0392%)
The PV at time 2 of the flows from time 3 in perpetuity = 10,000 / 0.0804 = 124,378
Giving a total at time 2 of 124,378 + 10,000 = 134,378Discounting to time 0 gives a PV of 134,378 / (1.102^2) = $110,653
(Alternatively you can get the value of the flows from time 3 in perpetuity by using the dividend valuation formula: (10,000 x 1.02) / (0.102 – 0.02) = 124,390. (The difference of 12 is simply rounding) )
This isn’t really very typical of the sort of things that are asked in F9.
- You must be logged in to reply to this topic.