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11
11. ?(Present value of a growing? perpetuity) What is the present value of a perpetual stream of cash flows that pays ?$6,500 at the end of year one and the annual cash flows grow at a rate of 2?% per year? indefinitely, if the appropriate discount rate is 11?%? What if the appropriate discount rate is 9?%?
A) If the appropriate discount rate is 11?%, the present value of the growing perpetuity is? $ (Round to nearest cent)
B) If the appropriate discount rate is 9%, the present value of the growing perpetuity is $ (Round to nearest cent)
Expert Solution
A). Computation of the present value of growing perpetuity:-
Present value of perpetuity = Cash flow for year 1 / (Discount rate - Growth rate)
= $6,500 / (11% - 2%)
= $6,500 / 9%
= $72,222.22 Or $72,222
B). Computation of the present value of growing perpetuity:-
Present value of perpetuity = Cash flow for year 1 / (Discount rate - Growth rate)
= $6,500 / (9% - 2%)
= $6,500 / 7%
= $92,857.14 Or $92,857
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