Question

Delayed perpetuity

The XYZ Corp. pays a $3 dividend every year. If the first dividend is due three years from now, what is the current price of XYZ?

Assume ks = 10%

Answer 1

if it is an ordinary perpetuity the value could have been:

Price of perpetuity = perpetual cash flow/ rate = $3/10% = $30.

But the price applies two years from today, the same is discounted to current using present value of money formula:

Present value of money:	=	FV/ (1+r) ^N
Future value	FV=	$                       30
Rate of interest	r=	10%
Number of years	N=	2
Present value	=	30/ (1+0.1)^2
	=	$                 24.79

Note: dividend is due three years from today, value of perpetuity comes for N-1 period which is 3-1=2 years from today.