Annuities and perpetuities

Annuities and perpetuities

1. 1. A perpetuity pays $500 per year starting next year. The discount rate is 4%. What is its present value? Answer in dollars to the nearest cent.

   $

2. 2. A stock will pay a $3 dividend next year, growing 5% per year forever. The cost of equity is 11%. Using the Gordon growth model, what is the stock worth? Answer in dollars to the nearest cent.

   $

3. 3. A 30-year mortgage of $400,000 at a 7% annual rate, monthly compounding (rate per month = 0.07/12). What is the monthly payment? Answer in dollars to the nearest cent.

   $

4. 4. Which assumption does the Gordon growth model require?

   g > rg < rg = rr = 0