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All about Perpetuities

30 April, 2015 - 10:04

A "perpetuity" is a theoretical bond which makes payment during its entire life. One realizable example of this is a company issued stock which always pays dividends each year. The lifetime is defined from the time of issuance until buy back or potential bankruptcy.

A perpetuity, such as preferred stock, can be valued by simply dividing the payment by the applicable discount rate.

PVPerpetuity \frac{C}{r}


XYZ Corp. preferred stock pays a $2 dividend every year. This dividend is expected to remain constant for the forseeable future. If investors are requiring a 10% return, what is the stock selling for?

PV = \frac{\$ 2}{.10}=\$ 20

Therefore, XYZ Co. stock should sell for $20 per share.