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If we assume that the dividend per share remains constant year after year at a value of D, then the eqn.(1) becomes
On simplification, we get
It means that the present value interest factor of perpetuity is simply 1 divided by the interest rate expressed in decimal form. Hence, the present value of the perpetuity is simply equal to the constant annual payment divided by the interest rate.
For example, the present value of a perpetuity of Rs 10,000 if the interest rate is 10% will be equal to:
10,000/0.10 = Rs 1,00,000.
The reason is that an initial sum if invested at a rate of interest of 10%, provide a constant annual income of Rs 10,000 forever without any impartment of the capital value. The no-growth case is equivalent to the valuation process for preferred stock because dividend amount remains unchanged.
