Strengths and Limitations of the Gordon Growth Model
Strengths It is simple and easy to implement. It is appropriate for valuing mature, dividend-paying companies. It is used to judge whether an equity market is fairly valued. It is used to model the last growth stage in a multistage…
Value of a Noncallable Perpetual Preferred Stock
Firms with no additional opportunities to generate returns above the required rate of return should distribute all of their earnings in dividends. Their securities have a specified fixed dividend rate and have no maturity date. As dividends on these securities…
Gordon Growth Model and the Price-to-Earnings Ratio
The price-to-earnings ratio (P/E) is the most widely recognized valuation indicator. Using the Gordon growth model, a P/E multiple can be developed. When forecasted inputs are used in the multiple, a justified fundamental P/E multiple is obtained. The expression of…
The Present Value of Growth Opportunities (PVGO)
The value of a stock can be evaluated as the sum of: The value of the company without earnings reinvestment, \((\text{E}_{1}/\text{r})\); plus The present value of growth opportunities (PVGO). $$\text{V}_0= \frac{E_1}{\text{r}}+\text{PVGO}$$ Where: \(\text{E}_{1}=\) Expected earnings at time, \(t = 1\)….
The Implied Dividend Growth Rate
Different growth rate assumptions may explain the differences between the estimated values of a share and the actual market value. Given the price, the expected dividend, and the required rate of return, the dividend growth rate reflected in the price…
The Gordon Growth Model
The Gordon growth model assumes that dividends grow indefinitely at a constant rate. $$D_t= D_{t-1} (1+g)$$ Where: \(g =\) Expected constant growth rate in dividends \(D_{t}=\) Expected dividend at time t. At any time \(t\), \(D_{t}=\) equals dividends at \(t =…
The Dividend Discount Model
Single Holding Period The cash flows to an investor who holds shares are the dividends paid and the market price of the share when they sell the share. For example, suppose an investor expects to hold the share for one…
