Youve recently learned that the company where you work is be

You’ve recently learned that the company where you work is being sold for $550,000. The company’s income statement indicates current profits of $24,000, 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 7 percent, at what constant rate does the owner believe that profits will grow?

Solution

Let growth rate of profit be G% per year.

Company\'s value = Next-period dividends / (Interest rate - Dividend growth rate)

$550,000 = $24,000 / (0.07 - G)

0.07 - G = $24,000/$550,000 = 0.0436

G = 0.07 - 0.0436

G = 0.0264

G = 2.64%