In business finance, an annuity is a series of equal payments received at equal intervals for a finite period of time. The present value of an n-period annuity takes the form

where R is the amount of the periodic payment and i is the fixed interest rate per period. Many corporations raise money by issuing preferred stock. Holders of the preferred stock, called a perpetuity, receive payments that take the form of an annuity in that the amount of the payment never changes. However, normally the payments for preferred stock do not end but theoretically continue forever. Find the limit of this present value equation as n approaches infinity to derive a formula for the present value of a share of preferred stock paying a periodic dividend R.

Transcribed Image Text:

P = R - (1+i)n i