A perpetuity pays the same payment every period forever. Stocks are like perpetuities although stocks often pay different dividends. Preferred stocks do pay the same dividend each period for as long as they are outstanding. There are also some debt securities that pay the same dividend forever.
Example: You have the opportunity to buy a perpetuity that pays $1,000 annually. Your required rate of return on this investment is 21.2 percent. What is the Present Value of the perpetuity (i.e. its current value)?
Present value of perpetuity=Annual inflows/required rate
=(1000/0.212)
which is equal to
=$4716.98(Approx).
A perpetuity pays the same payment every period forever. Stocks are like perpetuities although stocks often...