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In Xcel CFA Series you learn important CFA concept by solving a problem in MS
Excel.
To download more of Xcel CFA Series spreadhseets please visit our website.
Xcel CFA Series
Equity Investments
Reading 52
Gordon Growth Model
Calculate and interpret the intrinsic value of an equity security based on the
Gordon (constant) growth dividend discount model or a two-stage dividend
discount model, as appropriate.
From this sheet you will learn how to use gordon growth model to calculte the
intrinsic value of stock. You should know the conditions required for the model
to work and expect at least one exam question on the same concept.
In Xcel CFA Series you learn important CFA concept by solving a problem in MS
Excel.
To download more of Xcel CFA Series spreadhseets please visit our website.
Xcel CFA Series
Equity Investments
Reading 52
Gordon Growth Model
Calculate and interpret the intrinsic value of an equity security based on the
Gordon (constant) growth dividend discount model or a two-stage dividend
discount model, as appropriate.
From this sheet you will learn how to use gordon growth model to calculte the
intrinsic value of stock. You should know the conditions required for the model
to work and expect at least one exam question on the same concept.
Question
Options Stock Value
Increase in
Value Due to
Dividend
Growth
A $110 $75
B $107 $75
C $107 $70
Stock XYZ paid a dividend of $3 for financial year 2011 and its investors require a rate of return of
10% on equity. The dividends are expeted to grow at a constant rate of 7% in perpetuity. Calculate
the value of XYZ's stock as well as how much stoch value is due to dividend growth.
Solution
Gordon Growth Model Valuation
Dividend 3
Expected Growth Rate in Dividend 7%
Required Return on Equity (K
e
) 10%
FY 2012
Step 1: Calculate the dividend for FY 2012
Dividend 3.21
Step 2: Calculate the stock for FY 2012
Stock Value 107
Step 3: Calculate the stock value with a ZERO growth rate
Stock Value 32
Step 4: Calculate the stock value due to dividend growth
Stock Value with Growth 107
Stock Value without Growth 32
Stock value due to dividend growth 75
Condition for the model to work:
> k
e
must be greater than growth rate (g) and
> the k
e
& g should remain constant forever i.e they are never expected to change.
Condition for the model to work:
must be greater than growth rate (g) and
> the k
e
& g should remain constant forever i.e they are never expected to change.