Question

You’ve recently learned that the company where you work is being sold for $300,000. The company’s income statement indicates current profits of $11,000, 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 9 percent, at what constant rate does the owner believe that profits will grow? nstruction: Enter your response rounded to one decimal place.

Growth rate of: ___ percent.

Answer 1

5%

Step-by-step explanation:

Data provided in the question:

Present value of the company, PV = $300,000

Current Profits, π₀ = $11,000

Interest rate, i = 9% = 0.09

Now,

we know,

`PV = \pi_0((1+i)/(1-g))`

here,

g is the growth rate

on rearranging, we get

g =
`i - ((1+i)\pi_0)/(PV)`

on substituting the respective values, we get

g =
`0.09 - ((1+0.09)*11,000)/(300,000)`

or

g = 0.05

or

g = 0.05 × 100%

= 5%