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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?

Respuesta :

TomShelby

Answer:

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

Explanation:

we will calcualte the firm value using the gordon model:

[tex]\frac{divends}{return-growth} = Firm \: Value[/tex]

dividned 14,000

return 8%

Firm value: 425,000

[tex]\frac{divends}{return-growth} = Firm \: Value[/tex]

[tex]\frac{14,000}{0.08-growth} = 425,000[/tex]

[tex]\frac{14,000}{425,000} = 0.08-growth[/tex]

[tex]0.08 - \frac{14,000}{425,000} = growth[/tex]

g = 0.047058824

g = 4.70%

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