A perpetuity is a series of cash flow payments occurring in equal amounts forever. The formula used to calculate the present value of a perpetuity is as follows:
where:
CF = the periodic cash flow of the perpetuity
i = the discount rate
Assume an investor wanted to purchase a preferred stock that paid an annual dividend of $3.50, using a discount rate of 7%, what is the value of the preferred stock?
We can calculate the present value using the formula above as follows:
In this particular scenario, the present value of the stream of dividend payments for this particular security would be $50.00.