How to Calculate Simple Perpetuity
- 1). Determine the constant payment. Calculate the fixed coupon or dividend payment per period. For example, a holder of a perpetual bond with a par value of $100 and a coupon rate of 5 percent would receive $5 each year.
- 2). Determine the discount rate. Estimate the discount rate that most accurately reflects the investment's riskiness. The discount rates should take into account prevailing market conditions and the investment's idiosyncratic risk.
- 3). Calculate the value of the perpetuity. Divide the constant payment in Step 1 by the discount rate in Step 2. This represents the present value of the stream of cash flows associated with the perpetual security.
- 4). Conduct a sensitivity analysis. Test the value of the perpetuity using different discount rates. This will provide you with a range of values if your estimate of the discount rate is not completely accurate.
