Perpetuities and Annuities - Corporate Finance - Ivo Welch
Perpetuities and Annuities - Corporate Finance - Ivo Welch Perpetuities and Annuities - Corporate Finance - Ivo Welch
In 2000, the P/E ratio of the stock market reached about 45. If you assume that these corporations will grow roughly at the overall economy’s (GDP) growth rate of 4–5% per year, what should investors have reasonably expected in terms of a likely future rate of return implied by the stock market’s level? 24/1
Annuities An annuity is a financial instrument that pays CF dollars for T years. It has the following PV formula: T CF CF PV = ∑ t=1 (1 + r) t = r 1 · 1 – (1 + r) T ◮ Make sure you know when the first cash flow begins: It starts tomorrow [t = 1], not today [t = 0]! ◮ You should remember this formula, or at least be able to quickly derive it. I remember the formula, because an annuity is a perpetuity today, minus a (properly discounted) perpetuity in the future. CF 1 CF PV = – × r (1 + r) T r ◮ Sometimes, if there are fewer than 10 terms, I am too lazy to use it. I just use a computer. 25/1
- Page 1 and 2: Perpetuities and Annuities (Welch,
- Page 3 and 4: General Questions ◮ Are there any
- Page 5 and 6: Simple Perpetuities A perpetuity is
- Page 7 and 8: ...in another language ◮ If you k
- Page 9 and 10: What is the value of a promise to r
- Page 11 and 12: What is the perpetuity formula if t
- Page 13 and 14: Growing Perpetuities A growing perp
- Page 15 and 16: How can a growing infinite sum be l
- Page 17 and 18: What is the value of a firm that ju
- Page 19 and 20: In 10 years, a firm will have annua
- Page 21 and 22: What should be the share price of a
- Page 23: The Gordon Dividend Growth Model
- Page 27 and 28: Annuity Example: Mortgage Loan Here
- Page 29 and 30: Omitted: Principal and Interest Dec
- Page 31 and 32: What is the PV (or cost) of project
- Page 33 and 34: What if you need to use the buildin
- Page 35 and 36: Why is this EAC stuff in the annuit
- Page 37 and 38: What are the payments to a 5% semi-
- Page 39 and 40: Is the coupon rate of a bond equal
- Page 41 and 42: An insurance company offers a retir
- Page 43 and 44: The prevailing interest rate is 10%
- Page 45 and 46: Assume that our firm has stopped gr
- Page 47 and 48: An example drawn from an actual aut
- Page 49 and 50: If you took out a loan from the ban
- Page 51 and 52: Should you use perpetuities? How lo
- Page 53: Omitted, but in the book ◮ Proof
In 2000, the P/E ratio of the stock market reached about<br />
45. If you assume that these corporations will grow roughly<br />
at the overall economy’s (GDP) growth rate of 4–5% per<br />
year, what should investors have reasonably expected in<br />
terms of a likely future rate of return implied by the stock<br />
market’s level?<br />
24/1
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