CONNECT WITH LEARNSMART FOR BODIE: ESSE
CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196246
Author: Bodie
Publisher: MCG
Question
Book Icon
Chapter 11, Problem 1PS
Summary Introduction

To determine:

The reason behind infinite maturity of the perpetuity which can last as short as ten or twenty years.

Introduction:

Perpetuity refers to the annuity which comprises of stream of identical flow of cash. Such a stream persists for an infinite period of time. Perpetuity is usually takes into consideration for detemining the present value of the cash flow of the company that is discounted at a specific rate.

Expert Solution & Answer
Check Mark

Answer to Problem 1PS

The present value approaches zero for the flow of cash in the distant future, so that the impact on the weighted average can be reduced or nullified.

Explanation of Solution

Duration stands to be the weighted average of the cash flow associated with the maturity which is being paid to the perpetuity holder wherein weight pertaining to each flow of cash stands equivalent to the cash flow's present value divided by the Total present value of all cash flows. The weight becomes very small for the cash flow in the distant future, so that there is virtually, eventually no or very little impact on the weighted average due to these distant cash flows.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education