Let the interest rate be 10 percent (r = .10) at all maturities. Calculate the p

Question

Let the interest rate be 10 percent (r = .10) at all maturities.

Calculate the present value of a growing perpetuity that makes one payment per year with the first payment, made in exactly one year from now, being $1000. Let the payments grow at an annual rate of 10.5 percent (g = .105). Hint: Consider the trend in the present values as the growth rate increases by comparing your answers to a through c. If you use the standard growing perpetuity formula when g > r, you get a silly answer. Using your intuition from your answers to a through d, what is the real answer?   

Explanation / Answer

Present value of growing perpetuity when g =7%

=1000(10%-7%)

=33,333.33

Present value of growing perpetuity when g =9.9%

=1000(10%-9.9%)

=1,000,000

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