Introduction to Corporate Finance - Coursera
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  • Introduction
  • Corporate Finance - An Introduction
  • Time Value of Money
    • Discounting
    • Compounding
    • Annuity
    • Growing Annuity
    • Perpetuity
    • Growing Perpetuity
    • Taxes
    • Inflation
  • Interest Rates
    • APR and EAR
    • Term Structure
  • Discounted Cash Flow
    • Decision Making
    • Free Cash Flow
    • Forecast Drivers
    • Forecasting Free Cash Flow
    • Sensitivity Analysis
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  1. Time Value of Money

Growing Perpetuity

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Last updated 4 years ago

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A growing perpetuity is an infinite stream of cash flows that grow at a constant rate and that are evenly spaced in time.

E.g., Dividend streams

PV of Growing Perpetuity = CFR−g\frac{CF}{R-g}R−gCF​

Again, this formula assumes that the first cash flow occurs at t=1.

Also, g must be less than R.

Simple Example

How much do you have to save today to withdraw $100 at the end of this year, $102.5 after the next year,
$105.06 the year after, and so on forever, if you earn 5% per annum?

The timeline is as follows:

PV = 1000.05−0.025\frac{100}{0.05-0.025}0.05−0.025100​ = $4000