The Gordon Model
Coursework Assignment Number 1
The Gordon Model is particularly useful since it includes the ability to price in the growth rate of dividends over the long term. It is important to remember that the price result of the Constant Dividend Growth Model assumes that the growth rate of the dividends over time will remain constant. This is a difficult assumption to accept in real life conditions, but knowing that the result is dependent on the growth rate allows us to conduct sensitivity analysis to test the potential error should the growth rate be different than anticipated.
estimate of the present value of shares in Latrike plc
The following table is a record of dividends for a pharmaceutical company Latrike plc.
|Dividend per Share |2011 |2010 |2009 |2008 |2007 |
|In pence. | | | | | |
| |70.00p |65.00p |61.00p |57.00p |53.00p |
[pic]
Where [pic] is the price, at time zero, of a share. [pic] is the dividend expected at the end of a period [pic] is the return expected by investors during the period [pic] is the growth rate of dividends, estimated for the period.
The cost of equity share capital of Latrike plc.is estimated to be 11% per annum at this time.
From the above table, we can know:(Arnold, G. 2007) [pic]
[pic]
[pic][pic]
So the present value of shares in Latrike plc is 19.74[pic]
2.estimated share price change if the return expected by investors were to increase to 12%
If the return expected by investors were to increase to 12%, then
[pic][pic]
share price change=1974p-1563p=411p
Why might investors require an increased return from shares in Latrike plc?
The reason why investors are willing to invest，because the
The Gordon Model is particularly useful since it includes the ability to price in the growth rate of dividends over the long term. It is important to remember that the price result of the Constant Dividend Growth Model assumes that the growth rate of the dividends over time will remain constant. This is a difficult assumption to accept in real life conditions, but knowing that the result is dependent on the growth rate allows us to conduct sensitivity analysis to test the potential error should the growth rate be different than anticipated.
estimate of the present value of shares in Latrike plc
The following table is a record of dividends for a pharmaceutical company Latrike plc.
|Dividend per Share |2011 |2010 |2009 |2008 |2007 |
|In pence. | | | | | |
| |70.00p |65.00p |61.00p |57.00p |53.00p |
[pic]
Where [pic] is the price, at time zero, of a share. [pic] is the dividend expected at the end of a period [pic] is the return expected by investors during the period [pic] is the growth rate of dividends, estimated for the period.
The cost of equity share capital of Latrike plc.is estimated to be 11% per annum at this time.
From the above table, we can know:(Arnold, G. 2007) [pic]
[pic]
[pic][pic]
So the present value of shares in Latrike plc is 19.74[pic]
2.estimated share price change if the return expected by investors were to increase to 12%
If the return expected by investors were to increase to 12%, then
[pic][pic]
share price change=1974p-1563p=411p
Why might investors require an increased return from shares in Latrike plc?
The reason why investors are willing to invest，because the
References: 1.Constant Growth (Gordon) Model http://www.ultimatecalculators.com/constant_growth_model_calculator.html Arnold, G. (2007). Essentials of Corporate Financial Management. Harlow: Pearson Education Limited. 3.Jing xin,Wang huacheng,Liu yunyan(2009).science of financial management.Bei jing:China Renmin University Press.