Thats because i.e. $500 you'll get "in eternity" aren't worth anything anymore, so it's basically worth zero ($1 today is worth more than tomorrow). The equation is so simple, because the cashflow doesn't start until year one and the growing of the cashflow doesn't start until year two.
Hi there, thanks for your work on the video! I did see some DCF estimating the terminal value by using this but they also do CF*(1+g) on the numerator and keep the same denominator. I really wonder how they are different in number and meaning. (Does it mean the cash flow gets reinvested into the firm indefinitely -> (CF*(1+g)/(r-g)). Thank you!!!
i have a hard time understanding conceptually what a perpetuity is; i mean how realistic is it to obtain a CF for infinite years and, how can you obtain a PV of a number that has infinite CFs?
British issued bonds, called consols, are a great example of a perpetuity. By purchasing a consol from the British government, the bondholder is entitled to receive annual interest payments forever. Another example I can think of is in real estate when an owner purchases a property and rents it out. The owner is entitled to an infinite stream of cash flow from the renter as long as the property continues to exist (assuming the renter will rent). I hope this helps you grasp the concept better. Best of luck to you in your studies!
that makes sense, but how can you arrive to at PV of a number that has infinite CF's? If you are a homeowner with infinite streams of rent each month, how can you arrive to a PV (or any value) of of these infinite streams?
Hey jason..... It is possible to obtain a PV of a number that has infinite CFs. Let me explain how it is.... Think practically..... Why would some one give you perpetuity.....???? only just because, you have invested some amount with him today and wants to receive an infinite stream of cash flow from him and also you will never demands to repaid principal from him. So this means that, you have to deposit or invest some money today to receive an perpetuity and that amount you gonna invest today is called P.V. of perpetuity.
Yes, that is a delayed perpetuity (in this case, a delayed growing perpetuity). I'll post a video on delayed perpetuities sometime in the next few weeks, but long story short you need to do 2 steps. First, calculate the value of the growing perpetuity as you normally would. This gives you the value of the stream of cash flows at a future point in time, so the second step is to discount the value you obtained in step 1 to its present value using the formula for the present value of a single cash flow.
Hello, some text books state the PV of a pepetual annuity as a/r (a=periodic pmts, r=period rate), so can you please tell me what exactly is the growth rate? Because by the very nature of an annuity, it does grow (increase in amt) from period to period as a result of the period rate.Thank you.
Ivor, I think you are trying to find the present value of a perpetuity which can be found in this video: ua-cam.com/video/88-B0vXTTIU/v-deo.html The present value of a growing perpetuity (explained in this video) is calculated differently. The growth rate is the rate at which the future cash flows are expected to grow each year. Great question and thanks for watching!
If the growth rate is equal to or exceeds the discount rate, the present value of the growing perpetuity will be infinite and can therefore not be computed.
The BEST videos ever. Your TV videos are so helpful. Thank you
I am honestly struggling to understand how you can work out the PV of a perpetuity if it goes on forever.
Thats because i.e. $500 you'll get "in eternity" aren't worth anything anymore, so it's basically worth zero ($1 today is worth more than tomorrow). The equation is so simple, because the cashflow doesn't start until year one and the growing of the cashflow doesn't start until year two.
Why do you subtract the growth rate from the discount rate?
Hi there, thanks for your work on the video! I did see some DCF estimating the terminal value by using this but they also do CF*(1+g) on the numerator and keep the same denominator. I really wonder how they are different in number and meaning. (Does it mean the cash flow gets reinvested into the firm indefinitely -> (CF*(1+g)/(r-g)). Thank you!!!
Why do I even go to college? I can learn more in one night when using your material than an entire semester with my professor.
Then don't go. The college will be better off without students like you.
@@Raison_d-etre D:
How would you calculate the growth rate you had at the beginning? 10 -> 11 -> 12? The growth from 10 to 11 is different from the growth from 11 to 12?
You get the same formula in textbook as well.....I wish you had shown the derivation of the formula!!
i have a hard time understanding conceptually what a perpetuity is; i mean how realistic is it to obtain a CF for infinite years and, how can you obtain a PV of a number that has infinite CFs?
British issued bonds, called consols, are a great example of a perpetuity. By purchasing a consol from the British government, the bondholder is entitled to receive annual interest payments forever. Another example I can think of is in real estate when an owner purchases a property and rents it out. The owner is entitled to an infinite stream of cash flow from the renter as long as the property continues to exist (assuming the renter will rent). I hope this helps you grasp the concept better. Best of luck to you in your studies!
that makes sense, but how can you arrive to at PV of a number that has infinite CF's? If you are a homeowner with infinite streams of rent each month, how can you arrive to a PV (or any value) of of these infinite streams?
I agree. Your question makes sense.
Not infinite but perpetual until the rate of inflation brings the value to nothing.
Hey jason.....
It is possible to obtain a PV of a number that has infinite CFs.
Let me explain how it is....
Think practically.....
Why would some one give you perpetuity.....????
only just because, you have invested some amount with him today and wants to receive an infinite stream of cash flow from him and also you will never demands to repaid principal from him.
So this means that, you have to deposit or invest some money today to receive an perpetuity and that amount you gonna invest today is called P.V. of perpetuity.
does anyone know how to use a financial calculator to enter this formula? - essentially how to incorporate growth rate to a standard PV calculation.
Does he not need to grow 10,000 by (1+g)?
If the first cash flow is in the 3rd year, for example, does it change anything in the formula?
Yes, that is a delayed perpetuity (in this case, a delayed growing perpetuity). I'll post a video on delayed perpetuities sometime in the next few weeks, but long story short you need to do 2 steps. First, calculate the value of the growing perpetuity as you normally would. This gives you the value of the stream of cash flows at a future point in time, so the second step is to discount the value you obtained in step 1 to its present value using the formula for the present value of a single cash flow.
Hi sir could you please explain why growth rate is deducted from discount rate
Hello, some text books state the PV of a pepetual annuity as a/r (a=periodic pmts, r=period rate), so can you please tell me what exactly is the growth rate? Because by the very nature of an annuity, it does grow (increase in amt) from period to period as a result of the period rate.Thank you.
Ivor,
I think you are trying to find the present value of a perpetuity which can be found in this video: ua-cam.com/video/88-B0vXTTIU/v-deo.html
The present value of a growing perpetuity (explained in this video) is calculated differently. The growth rate is the rate at which the future cash flows are expected to grow each year.
Great question and thanks for watching!
What happens if the growth rate is greater than the discount rate?
If the growth rate is equal to or exceeds the discount rate, the present value of the growing perpetuity will be infinite and can therefore not be computed.
Pretty good
How i can estimate the discount rate?
rodrigo motta weighted average cost of capital
It’s 25,000 not 250,000
I think you plugged in 1,000 instead of 10,000