Final answer:
To value a company with perpetuity cash flows starting in two years using a 5% discount rate, the present value formula for perpetuities is adjusted to account for the delayed start of cash flows.
Step-by-step explanation:
The student seeks to value a company generating a perpetuity cash flow of $1,500 starting in two years, using a discount rate or opportunity cost of capital of 5%. Valuation of such cash flows can be done using the formula for the present value of a perpetuity:
PV = C / r
where PV is the present value, C is the cash flow received perpetually, and r is the discount rate. However, because the cash flows start in two years, we also need to discount this perpetuity back to present value using the formula:
PV = C / r * (1 / (1 + r)t)
where t is the number of years until the perpetuity payments begin. In this case, C would be $1,500, r would be 0.05 (5%), and t would be 2. Following these steps, the value of the company can be calculated as follows:
PV = $1,500 / 0.05 * (1 / (1 + 0.05)2)