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You’ve recently learned that the company where you work is being sold for $500,000. The company’s...

You’ve recently learned that the company where you work is being sold for $500,000. The company’s income statement indicates current profits of $25,000, 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?

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Answer #1

We need to solve the following equation to calculate the required growth rate:

  • The required growth rate is 3.81% rounded to 2 decimal places
  • As we are given current profits, all of which are to distributed as dividends, we hace the current dividends value, and we need to multiply it with (1+g) to find out the expected dividend to be used for calculation in the formula above
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