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Gordon's Model

Gordon’s Model

Myron Gorden suggest one of the popular model which assume that dividend policy of a firm affects its value, and it is based on the following important assumptions:

1. The firm is an all equity firm.

2. The firm has no external finance.

3. Cost of capital and return are constant.

4. The firm has perpectual life.

5. There are no taxes.

6. Constant relation ratio (g=br).

7. Cost of capital is greater than growth rate (Ke >br).

finance
[Post Image Courtesy of Gualberto107 at FreeDigitalPhotos.net]

Gordon’s model can be proved with the help of the following formula:

P = E (1 - b) / Ke - br

Where,

P = Price of a share

E = Earnings per share

1 – b = D/p ratio (i.e., percentage of earnings distributed as dividends)

Ke = Capitalization rate

br = Growth rate = rate of return on investment of an all equity firm.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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