posted by Eli .
Marie-Josee intends to buy her father company. He wishes to sell her his company for a $850 000 amount because he would like to bequeath his inheritance to his daughter in his lifetime. Knowing the big generosity of her father, Marie-Josee wishes to make projections to estimate the company value before purchasing it. According to the book value, the company possesses 25 000 ordinary shares. Marie-Josee anticipates that the actual profit of $5,26 per action should grow to 15 % rate a year for the next 3 years. She also considers that the company should reinvest all its profits in the company during the first two years to support its growth. She plans that the company can distribute 40 % of its profits in dividends afterward. This annual dividend should grow at a 12 % rate during the next five years to decrease by 1 % afterward until the moment when the growth rate of the dividend will reach 8 % and this, infinitely. The return rate demanded by the shareholders for similar companies rise at 14 %.
a) According to those projections, what price Marie-Josse should pay to buy the company of her father?
b) Knowing that Marie-Josee really buy the company of her father $850 000, what is the value of the inheritance?