How to Calculate the Present Value of a Perpetuity

A perpetuity is a series of cash flow payments occurring in equal amounts forever. The formula used to calculate the present value of a perpetuity is as follows:

present value of a perpetuity formula

where:

CF = the periodic cash flow of the perpetuity
i = the discount rate

Assume an investor wanted to purchase a preferred stock that paid an annual dividend of $3.50, using a discount rate of 7%, what is the value of the preferred stock?

We can calculate the present value using the formula above as follows:

where; CF =$3.50, i = 0.07

In this particular scenario, the present value of the stream of dividend payments for this particular security would be $50.00.

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