finance question

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Dear everyone,
kindly help me to solve this question:

Q: If we want to get a 10 % rate of return on our money and we assume that the company will grow forever at 5 % per year, then how much we would be willing to pay now to get 50,000 after 6 years for this stock?

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Type: Question • Score: 6 • Views: 3,480 • Replies: 24

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View best answer, chosen by subah

@subah,

No one on this planet can predict income or growth of any company.

0 Replies

@subah,

subah wrote:

Dear everyone,
kindly help me to solve this question:

Q: If we want to get a 10 % rate of return on our money and we assume that the company will grow forever at 5 % per year, then how much we would be willing to pay now to get 50,000 after 6 years for this stock?

Well, if this is just a question for assuming what will happen, in order to get $50,000 in 6 years earning 10% interest, you'd have to invest about $28300 today.

http://www.investopedia.com/calculator/fvcal.aspx

1 Reply

@chai2,

how did you do it? I need whole method.

3 Replies

@subah,

I'm not home now, but will provide the answer later today.

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@subah,

Links are common on the internet for calculators of that sort. I provided the link I used below my comment.

Now I wasn't taking into consideration the 5% growth per year of the company. Because I'm not an accountant or economist, I really don't know how that would factor in.

Is this a real life question, or something your doing for a class?

1 Reply

@subah,

The compound interest formula is:

FV = PV (1+i)^n

Where FV = Future value
PV is the present value
i is the interest rate
n is the time

In this case, FV = 50,000, PV is what you are trying to find, i = 0.10 and n is 5.
50,000 = PV (1+.1)^6
50,000 = PV * 1.77
PV = 28233

I'm not sure what you are doing with the 5% company growth term. You provide two growth rates. Which do you want to apply? Either way, the formula above works.

2 Replies

@engineer,

I think he wants both.

1 Reply

@cicerone imposter,

I'm still wondering about that 5% company growth rate.

Maybe he's thinking as it grows there will be stock splits?

But that wouldn't matter, since the value of each share goes down.

It's a puzzlement.

1 Reply

@chai2,

Nothing to do with stock splits. The company grows at 5% every year.
If the value of the company is $1-million, it would grow $50,000 the first year: $1 million plus $50,000 = $1,050,000. The following year, it would grow by (at 5%) $52,500; $1,050,000 + $52,500 = $1,102,500, so on, and so forth.

1 Reply

@cicerone imposter,

Right, but why does he bring up the 5% growth?

Was that just to throw us off the trail?

2 Replies

@chai2,

He might be trying to lull us into a false sense of complacency

0 Replies

@chai2,

He's asking for a solution to the problem:

Quote:

Q: If we want to get a 10 % rate of return on our money and we assume that the company will grow forever at 5 % per year, then how much we would be willing to pay now to get 50,000 after 6 years for this stock?

He wants to know how much needs to be invested to reach his $50,000 goal in six years at 5% growth per year.
Since I couldn't download a spreadsheet to work out the problem, I'm afraid the formula provided earlier needs to suffice.

1 Reply

@cicerone imposter,

But he wants a 10% rate of return.

1 Reply

@chai2,

His goal is to reach $50,000 in six years. All he wants to know is how much his initial investment needs to be. The earnings rate doesn't need to be 10%.

1 Reply

@chai2,

am doing it for a class

0 Replies

@engineer,

i used the same formula.
but two rates are given we are suppose to take in both.

0 Replies

@cicerone imposter,

Thanks i think your right. all require is initial investment.

1 Reply

@subah,

You know, I've been at this 'game' on a2k since its inception, and it's the very first badge that I've been awarded. It made my day! Hell, it made my year. Thank you.

0 Replies

@subah,

It's very difficult to tell the exact situation of the company after 6 years, It can be an assumption only.

1 Reply

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