The company where you work is being sold for 240000 The comp

The company where you work is being sold for $240,000. The company\'s income statement indicates current profits of $8,000, which have yet to be paid out as dividends. Assuming the company will remain on the market in the infinite future, and the interest rate will remain constant at 4%, at what constant rate does the owner believe that the profits will grow?

Solution

Next-period dividend = Unpaid current profit = $8,000

If profit growth rate by g% per year, then

Firm value = Next-period dividend / (g - Interest rate - g)

$240,000 = $8,000 / (g - 0.04)

(g - 0.04) = $8,000 / $240,000 = 1/30

30 x (g - 0.04) = 1

30g - 1.2 = 1

30g = 2.2

g = 0.0733

g =7.33%