Which of the following is true about perpetuities? A. If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. B. All else equal, the present value of a perpetuity is higher when the interest rate is lower. C. All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. D. All of the above are true statements.

Question

Business

Janiah

22 November, 08:46

Which of the following is true about perpetuities? A. If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. B. All else equal, the present value of a perpetuity is higher when the interest rate is lower. C. All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. D. All of the above are true statements.

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Nathaly Bartlett · Answer 1

The correct answer is D. All of the above are true statements.

Explanation:

Perpetuality is a series of infinite cash flows over time. The perpetuities are similar to the annuities in the sense that they are payments for equal amounts made in equal time intervals, the difference is that the payments or fees of the perpetuities are forever, as the name implies.

This tool is especially useful for valuing companies and, therefore, their actions, given their nature of having perpetual life. Some investments, such as preferred shares and bonds, are essentially perpetuities, and to transfer these assets from investors to investors it is necessary that they have a present value (VP).