Perpetuity
A level payment that continues forever. Its present value is simply the payment divided by the discount rate, because payments far enough away are worth almost nothing today.
Where you will meet it
Perpetuity appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Set out what the Gordon growth model takes for granted and how sensitive its output is to inputs
“Both assumptions are strong: no company grows faster than the economy in perpetuity, and a growth rate set even slightly too close to the required return sends the denominator toward zero and the value toward infinity.”
- Work out what an annuity and a perpetuity are worth today
“An annuity is a fixed payment for a fixed number of periods; a perpetuity is the same payment forever.”
- Work out the cost of both common and preferred equity
“Preferred equity pays a fixed dividend with no maturity, so its cost is the dividend divided by the current price — a perpetuity calculation.”
- Explain FCFF and FCFE models with one stable-growth stage, two stages and three stages, and argue which suits a given firm's characteristics
“A two-stage model suits a company with a period of high growth that then settles; the first stage is forecast year by year and the second valued as a growing perpetuity.”
See also
Learn it properly
Practise it
Practise perpetuity until it is automatic: questions that explain every wrong option.
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