Perpetuity

A perpetuity is a stream of payments or a type of annuity that starts payments on a fixed date and such payments continue forever, or perpetually. Often preferred stock which pays a dividend is considered as a form of perpetuity. However, one must assume that the firm does not go bankrupt or is otherwise impeded for making timely payments. The formula for evaluating a perpetuity is relatively straight forward. It is simply the expected income stream divided by a discount factor or market rate of interest. It reflects the expected present value of all payments. It is comparable to a perpetual bond or consol in this respect. If a preferred issue pays a $2.00 quarterly dividend and the annual interest rate is 5 percent then one would expect to be willing to pay 2.50/.0125, or $200 per share. Here, the 5 percent interest rate was adjusted for a simple quarterly disbursement (.05/4 = .0125).