Financial Management: Principles and Applications, 13/e

6.2 Perpetuities

A perpetuity is simply an annuity that continues forever or has no maturity. It is difficult to conceptualize such a cash flow stream that goes on forever. One such example, however, is the dividend stream on a share of preferred stock. In theory, this dividend stream will go on as long as the firm continues to pay dividends, so technically the dividends on a share of preferred stock form an infinite annuity, or perpetuity.

There are two basic types of perpetuities that we will encounter in our study of finance. The first is a level perpetuity, in which the payments are constant over time. The second is a growing perpetuity, in which the payments grow at a constant rate from period to period over time. Let’s consider each in ...