Question

You’ve recently learned that the company where you work is being sold for $425,000. The company’s income statement indicates current profits of $14,000, which have yet to be paid out as dividends. Assuming the company will remain a "going concern" indefinitely and that the interest rate will remain constant at 8 percent, at what constant rate does the owner believe that profits will grow?

Answer 1

It expect the firm profit will grow at 4.70% per year.

Step-by-step explanation:

we will calcualte the firm value using the gordon model:

`(divends)/(return-growth) = Firm \: Value`

dividned 14,000

return 8%

Firm value: 425,000

`(divends)/(return-growth) = Firm \: Value`

`(14,000)/(0.08-growth) = 425,000`

`(14,000)/(425,000) = 0.08-growth`

`0.08 - (14,000)/(425,000) = growth`

g = 0.047058824

g = 4.70%