# Present value of a growing perpetuity

D

#### DarkProtoman

My CFO has decided to issue perpetual bonds with a 10% interest rate,
growing at a rate of 10%/year, with a par value of \$1000. My question
is, if our company is liquidated, or it goes out of business, we need
to know how much to pay the holders of the perpetual bonds, so we need
to know the present value of the bond, and I forgot how to calculate
the present value of a growing perpetuity. And, at what year will the
interest payments equal the par value. I am the CEO of ProtoTech
Industries.

G

#### Guest

This sounds like a Ponzi scheme! Let's assume today's risk-free
rate of return (U.S. bonds) is 5%. Are you saying you're going to
offer twice that forever? If there was no risk, your bonds would have
a present value of about \$2000. In fewer than 25 years, such a
bond would be paying it's par value in yearly interest. No healthy
company would buy this sort of debt structure without a way to shut
it off. You'd have to bet on going out of business without really
having
to pay the investors back.
Joe

D

#### DarkProtoman

And what is your company's web site? When I check
http://www.prototechindustries.com it lists the CEO
as Mary Ann Butler...
That's a real company? Wait... what state is it in, b/c we're
California... Actually, I'm thinking of finding ways to finance my
startup, which is still in the planning stages; can't use any more
equity, because we're going to have the board hold 100% of the class S
shares, which have 100 votes/share, and have employees/VIPs hold 100%
class A shares, which have 75 votes/share; we're trying to raise
\$200,000; we have \$150,000 already signed up, and we're going to
finance the remainder through debt. Guess we have to change our
proposed name...

Anyway,what would the interest rate be when the bond pays it's par
value interest? Or we could index the rate to the rate of inflation,
plus the prime rate, which I believe is currently 8.25%. Any other good
financing strategies? Any one? Thanks!!!!