Implications of gordon’s fundamental valuation, Financial Management

Assignment Help:

Q. Implications of Gordons fundamental valuation?

Explanation: - The implications of Gordon's fundamental valuation may be as below:

(1) While the rate of return of the firm on its investment is better than the cost of capital the price per share raise as the dividend payout ratio decrease. Therefore the growth firm should distribute smaller dividends and should retain maximum earnings.

(2) While the rate of return is equal to the cost of capital than the price per share remains unchanged and isn't affected by dividend policy. Therefore for a normal firm there isn't optimum dividend policy.

(3) While the rate of return is less than the cost of capital the price per share increases as the dividend payout increases. Therefore the shareholders of declining firm stand to increase if the firm distributes its earnings for such firms.

(4) According to Gordon, the market value of the share is equal to the present value of future stream of dividends. Therefore,

P =       D1 /  (1+K) 1 + D/ (1+K) 2 + ----- + Dt / (1+K) n

P = Market Price per share

K = Appropriate discount rate to calculate risk and time factors

Gordon's Formula for determining the value of a share:-

P = E x (1-b) / Ke-br OR P = D / Ke-g

Where P = Market Price per share                                          E = Earnings Per Share

r = Firm's rate of return                                              b = retention ratio

br = g = Growth rate                                                   (1-b) = D/P ratio

Ke = Cost of Capital


Related Discussions:- Implications of gordon’s fundamental valuation

Equity theory, Equity Theor y This theory proposes that indivi...

Equity Theor y This theory proposes that individuals measure their out- comes/input ratio. Equity theory distinguish that inspiration is not the outcome of an absolute

Finance, #qSeven years ago, after 15 years in public accounting, Stanley Bo...

#qSeven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his posiition as Manager of Cost Systems for Davis, Cohen, and O''''''''Brien Public Accountan

Clearing and settlement - t- bills, Clearing and Settlement The Treasur...

Clearing and Settlement The Treasury Bills are available in physical form if an investor desires so. The market is mostly dominated by institutional players who have a facility

Credit policy, What is the Credit Policy? Describe please.

What is the Credit Policy? Describe please.

Default risk, Default risk is the risk that arises when the iss...

Default risk is the risk that arises when the issuer is not able to satisfy the terms and conditions of the obligation with respect to timely pa

Show the working capital forecasting techniques, Q. Show the Working Capita...

Q. Show the Working Capital Forecasting Techniques? Working Capital Forecasting Techniques or else Computation Of Working Capital: - A number of processes are used to determine

#title.OPERATING CYCLE, DISCUSS THE APPLICABILITY OF OPERATING CYCLE IN VEG...

DISCUSS THE APPLICABILITY OF OPERATING CYCLE IN VEGETABLE GROWING.

Give brief introduction to financial management, Introduction to Financial ...

Introduction to Financial Management Companies don't work in a vacuum, isolated from everything else. It transacts andinteracts with the other entities present in economic envi

Micro/Macro Question, You have been hired as an economic advisor to the Sou...

You have been hired as an economic advisor to the Southeastern Conference. As your first assignment they have asked you to identify three microeconomic and three macroeconomic issu

Explain the dividends and interest payments, Dividends and interest payment...

Dividends and interest payments Payment  of  dividends  and  interest  can  either  be  demonstrated under financing activities or  under operating activities. Sum of the 3

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd