Page 15 - FINAL CFA SLIDES JUNE 2019 DAY 2
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LOS 6.e: Calculate and interpret the FV & Session Unit 2: The Time Value of Money
PV of a single sum of money, an ordinary
annuity, an annuity due, a perpetuity (PV
only), and a series of unequal cash flows.
Present Value of a Perpetuity
Example: Example: PV of a perpetuity: Kodon Corporation issues preferred stock that will pay $4.50 per year
in annual dividends beginning next year and plans to follow this dividend policy forever. Given an 8% rate of
return, what is the value of Kodon’s preferred stock today?
Answer: PV perpetuity = 4.50/0.08 = $56.25
Example: Rate of return for a perpetuity: Using the Kodon preferred stock described in the preceding
example, determine the rate of return that an investor would realize if she paid $75 per share for the stock.
Answer: Rearranging the equation: I/Y = PMT / PV perpetuity = 4.50 / 75.00 = 0.06 = 6.0%
Example: PV of a deferred perpetuity: Assume the Kodon preferred stock in the preceding examples is scheduled to pay
its first dividend in four years, and is non-cumulative (i.e., does not pay any dividends for the first three years). Given an
8% required rate of return, what is the value of Kodon’s preferred stock today?
