(Related to Checkpoint 6.5) (Present value of a growing perpetuity) What is the
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Question
(Related to Checkpoint 6.5) (Present value of a growing perpetuity) What is the present value of a perpetual stream of cash flows (hat pays $1.000 at the end of year one and the annual cash flows grow at a rate of 3% per year indefinitely, if the appropriate discount rate is 13%? What if the appropriate discount rate is 11%? a. If the appropriate discount rate is 13%. the present value of the growing perpetuity is $ (Round to the nearest cent.) b. f the appropriate discount rate is I 1%, the present value of the growing perpetuity is $. (Round to the nearest cent.)Explanation / Answer
(A) PV = CF/(r-g)
= 1000 / (0.13 - 0.03) = $10,000
(b) PV = CF/(r-g)
= 1000 / (0.11 - 0.03) = $12,500
Where, g = growth rate
r = discount rate
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