Question

An annuity that goes on indefinitely is called a perpetuity. The payments of a perpetuity constitute a/an series. The equation is: A stock with no maturity is an example of a perpetuity. Quantitative Problem: You own a security that provides an annual dividend of $115 forever. The security’s annual return is 5%. What is the present value of this security? Round your answer to the nearest cent. $

Answer 1

The present value of security is $2300

Step-by-step explanation:

The value or price of the perpetuity today is calculated by dividing the constant cash flow it provides per period by the interest rate or the rate of return (r). Thus the price of this perpetuity according to the formula will be,

Value of perpetuity = Cash flow / r

Value of perpetuity = 115 / 0.05

Value of perpetuity = $2300