Question

If a business buyer estimates that 20 percent is a reasonable rate of return for an existing business expected to produce a profit of $27,000, its capitalized value would be

Answer 1

To solve this problem let us recall that the formula for profit is:

Profit = (Rate of return) * (Capital value)

Rewriting this in terms of Capital value:

Capital value = Profit / Rate of return

Substituting the given values:

Capital value = $27,000 / 0.20

Capital value = $135,000