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April 24, 2014

Homework Help: business

Posted by john on Saturday, January 7, 2012 at 7:44pm.

You have recently learned that the company where you work is being sold for $275,000. The company’s income statement indicates current profits of $10,000 which have yet to be paid out as dividends. Assuming the company will remain a “growing concern” into the infinite future and that the interest rate will remain constant at 10%, at what constant rate does the owner believe the profits will grow? Does this seem reasonable?
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I have a bunch of formulas but don't know how to go about answering this question

P=  D/k
P=  D1/(k  g)

where P  present price of stock
D  dividends received per year (in year 1, year 2, . . . year n)
k  discount rate applied by financial community, often referred to as cost of
equity capital of company
where D1  dividend to be paid during coming year
g  annual constant growth rate of dividend expressed as a percentage

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