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In finance, perpetuity is defined as a continuous stream of identical cash flows with no end. The concept of perpetuity is used in several financial theories, such as in the dividend discount...
Perpetuity in the financial system is a situation where a stream of cash flow payments continues indefinitely or is an annuity that has no end. In valuation analysis, perpetuities are used to find the present value of a company’s future projected cash flow stream and the company’s terminal value.
Perpetuity Formula. To calculate the present value (PV) of a perpetuity with zero growth, the cash flow amount is divided by the discount rate.
Preferred stocks in most circumstances receive their dividends prior to any dividends paid to common stocks and the dividends tend to be fixed, and in turn, their value can be calculated using the perpetuity formula.
The present value of a perpetuity is equal to the regular payment divided by the discount rate and can be expressed with the following perpetuity formula: PV = D / R. where: PV is the present value of perpetuity — how much the perpetuity is worth, D is the dividend or regular payment — the amount of cash flow received every period,
What Is the Perpetuity Formula? The perpetuity formula proceeds as follows: Present Value (PV) = Cash Flow (CF)/Interest Rate (IR). It acts as an innate perpetuity calculator capable of determining all present and future cash flows for investments of this type.
The duration, or the price-sensitivity to a small change in the interest rate r, of a perpetuity is given by the following formula: [3] D = 1 r {\displaystyle D\ =\ {1 \over r}}