Question

An annuity that goes on indefinitely is called a perpetuity. The payments of a perpetuity constitute a/an series. The equation is: A stock with no maturity is an example of a perpetuity. Quantitative Problem: You own a security that provides an annual dividend of $170 forever. The security’s annual return is 9%. What is the present value of this security? Round your answer to the nearest cent. $

Answer 1

Answer:

Present value of the security = $1,888.89

Explanation:

The annual dividend of $170 represents a perpetual income stream. The present value of a perpetuity is calculated as follows:

$PresentValue=\frac{Coupon}{r}$

where r =interest rate per annum that would be compounded for each year

Therefore, present value of the security = $\frac{170}{0.09}$ = $1,888.89