What is the present value of a perpetual stream of cash flows that pays ?$1,500 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 11?%? What if the appropriate discount rate is 9?%?

Finance Dec 09, 2020

Expert Solution

a) When discount rate = 11%

PV of growing Perpetuity = Year 1 Cash flow / (Discount rate-Growth rate)

= $1,500/(11%-3%)

= $1,500/8%

= $18,750

b) When discount rate = 9%

PV of growing Perpetuity = Year 1 Cash flow / (Discount rate-Growth rate)

= $1,500/(9%-3%)

= $1,500/6%

= $25,000

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