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…

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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…

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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…

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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, \(t = 1\)….

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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…

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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 =…

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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…

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Present Value Models
Discounted cash flow (DCF) models view the intrinsic value of a stock as the present value of its expected future cash flows. The four steps in applying DCF analysis to equity valuation are: Selecting a specific definition of cash flow....
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Return on Invested Capital and Competitive Advantage
Return on invested capital (ROIC) measures the profitability of the capital invested by the company’s shareholders and debt holders. $$\text{ROIC}=\frac{\text{Net operating profit less adjusted taxes (NOPLAT)}}{\text{Invested capital}}$$ NOPLAT is earnings before interest expense which is earnings available to equity holders...
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Analyzing Operating Margins and Sales Levels
Analysts usually consider costs at a more aggregate level than the level used to analyze revenue and use a top-down, bottom-up, or hybrid approach when forecasting them. Variable costs are linked to revenue growth and may be modeled as a...
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