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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.

Respuesta :

Answer:

5%

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,            

[tex]PV = \pi_0(\frac{1+i}{1-g})[/tex]

here,

g is the growth rate        

on rearranging, we get          

g =  [tex]i - \frac{(1+i)\pi_0}{PV}[/tex]

on substituting the respective values, we get

g = [tex]0.09 - \frac{(1+0.09)\times11,000}{300,000}[/tex]

or  

g = 0.05

or

g = 0.05 × 100%

= 5%

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