Perpetuities and Annuities - Corporate Finance - Ivo Welch

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Maintained Assumptions In this chapter, we maintain the assumptions of the previous chapter: ◮ We assume perfect markets, so we assume four market features: 1. No differences in opinion. 2. No taxes. 3. No transaction costs. 4. No big sellers/buyers—we have infinitely many clones that can buy or sell. ◮ We assume perfect certainty, so we know what the rates of return on every project are. ◮ We assume equal rates of returns in each period (year). 2/1
General Questions ◮ Are there any shortcut NPV formulas for long-term projects—at least under certain common assumptions? ◮ Or, do we always have to compute long summations for projects with many, many periods? ◮ Why do some of the folks in the room have the ability to quickly tell you numbers that would take you hours to figure out? ◮ How are loan payments (e.g., for mortgages) computed? 3/1
Page 1: Perpetuities and Annuities (Welch,
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 and 24: The Gordon Dividend Growth Model
Page 25 and 26: Annuities An annuity is a financial
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
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Perpetuities and Annuities - Corporate Finance - Ivo Welch

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