Using a certain number of assumptions based on stock values of a firm, Gordon growth model explains constant payment growth rate. This valuation is intrinsic in nature where the speculation highlights of future dividend series. In this simple manner, at helpmeinhomework.com,we make sure that confused students like you get better comprehension on this subject and secure excellent grades. And for this, our subject experts have designed GORDONS Model homework help manual.
Stating Gordon’s model in brief
Gordon’s model is also called DDM or dividend discount model. This model is used for describing stock value as per present market scenario. This model is named after financial scholar Professor Myron J. Gordon in the 60s.There are 2 more basic forms under this particular model.
Multistage Growth Model
When assumed dividend growth is not moving at a fixed rate, evaluation and incorporation of dividends per annum are what investors need to look forward. As per this model, assumptions always revolvearound the faith that there will be an eventual growth in dividend rate.
This model explains value of stock with a specific formulation.
D1÷ [K – g]
- ‘g’ is speculated growth rate of dividend
- ‘K’ is discount rate of investors
- ‘D1’ is speculated yearly dividend per share for the coming year
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Assumptions that this model explains
There are mainly 6 assumptions that you can find via Gordon’s model. Among those, here are few important ones.
- Capital cost is higher that return rate of a company
- This model states that at one point in time the growth rate becomes constant
- When it comes to company life, it is considered as indefinite
Advantages of this model
There are various advantages of this model that you will come to know via GORDONS Model homework help manual. Some of them are:
- Simple to analyse and understand
Via this model one can easily understand how dividend growth works and why assumptions are based on it. Mimicking a company’s actual dividend pattern, this model reduces the complexity of its comprehension.
This model represents the stable and mature dividend pattern of a firm helping to find any probable indices.
- Reverse logic
Unlike other models, Gordon’s growth model follows reverse analysis using present share prices. This helps to follow market trend and recognise right intrinsic share valuation intuitively.
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