Question

What is the present value of a perpetual stream of cash flows that
pays $5,500 at the end of the year one and the annual cash flows
grow at a rate of 2% per year indefinitely, if the appropriate
discount rate is 13%? What if the appropriate discount rate is
11%?

Answer #2

Present value of perpetual cash flows | = | C1/(Ke-g) | Where, | |||||||||||

= | 5500/(13%-2%) | C1 | Cash flows at end of Year 1 | |||||||||||

= | $ 50,000.00 | Ke | Discount rate | |||||||||||

g | Growth rate | |||||||||||||

Present value of perpetual cash flows | = | C1/(Ke-g) | Where, | |||||||||||

= | 5500/(11%-2%) | C1 | Cash flows at end of Year 1 | |||||||||||

= | $ 61,111.11 | Ke | Discount rate | |||||||||||

g | Growth rate | |||||||||||||

answered by: anonymous

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