Talk:Gordon model

aplicability

I think the last edit confuses the role of models in financial markets. Every model always has some place where it does not apply, but they can still help sort out general relations between "causes" and "effects". The current edit seems to say "There are some places where this model is difficult to apply, so we should throw the whole thing out!" Baby with the bathwater. Smallbones 19:08, 15 October 2006 (UTC)

Tend to agree. I find it useful for first level approximations particularly when the market has not yet made any decisions on the stock or the business is not on the sharemarket. BernardZ 21:13, 29 December 2006 (UTC)

The forumula here is wrong. P = D/k-g for single stage. 68.251.254.187 09:16, 21 March 2007 (UTC)mj

I think it is not wrong, but used slightly different assumptions. I have added something to explain the difference.--Chakreshsinghai (talk) 07:30, 20 January 2008 (UTC)

I do think the formula presented here: P = D (1+g)/k-g is wrong. If you sum the geometric series the result is P = D (1 + k)/ (k - g) I have seen similar mistakes in several books about valuations. If the series is the sum of (r)^n from n=0 to infinite, the result is 1 / (1-r). This is available also on the Internet. —Preceding unsigned comment added by 83.43.217.123 (talk) 20:46, 26 September 2010 (UTC)

In practice

I want some studies first before I accept this point

d) By watching the reaction of a stock's price to earnings announcements that reflect growth rates that differ from the projected rates, it can be determined that the stock price does NOT fall 50% when only 6% growth was realized, instead of 7%. So it appears that the market is not using this model, it is dangerous to take extreme positions based upon it.

The first thought that springs to mind is that the market may have taken into account already that the projected rate is not going to be reached. BernardZ 03:45, 22 January 2007 (UTC)

In the real world determining future growth rates and the required rate of return is very difficult. While it is possible to distiguish between low, moderate and high growth rate outlooks, forecasting growth rate outlooks that are only a few percentage points apart is very subjective. The model does not work for high growth companies because their growth outlook exceeds the required rate of return.

There are several different possible approachs to establishing the required rate of return. The required rate of return is established by the Capital Asset Pricing Model (CAPM). It adds a risk premium to the the risk-free rate of return (the current 30 day Treasury yield.) See Brigham & Houston, Fundamentals of Financial Management, Harcoourt College Publishers.

An alternative way to establish the required rate of return is to add a risk preimum of 3 to 5 percentage points to the current yield to maturity of the company's long term debt.Bobflash24 (talk) 15:08, 20 December 2009 (UTC)

Examples

Needs some good examples.--Chakreshsinghai (talk) 07:28, 20 January 2008 (UTC)

I just want to know the logic behind this (k-g), means subtraction of growth rate from rquired rate of return. Please help. —Preceding unsigned comment added by 202.125.158.230 (talk) 13:27, 1 April 2008 (UTC)

Dividend Discount Model

I've removed from this article a link to Dividend Discount Model, which redirects back to this article. Given that it redirects here, it struck me as odd that the only mention this article made of it was in the see also section. I looked at the page history for "Dividend Discount Model" and found that there was a stub there, but it was turned into a redirect without discussion. It seems plausible that the article might have deserved to be replaced by a redirect, but I have neither the time nor the expertise to judge. Could somebody who knows the subject check that it doesn't deserve an article, check whether the articles still need to be merged and/or clarify the connection between the two topics? See the Dividend Discount Model stub. Tim Ivorson 2008-11-01

derivation section

If there's no objections I am going to remove it since it's essentially just the formula for the convergent sum Sum x, x<1, hence not really necessary here.Volunteer Marek (talk) 05:48, 11 May 2011 (UTC)