Calculating Free Cash Flow to the Firm: Method #2: Cash Flow From Operations
February 12, 2025
Many students often find tax policy confusing. This is probably because it uses complex terms. The tax base is one such term that is often used in tax literature. The meaning of this term is often not completely understood by tax students. This creates further confusion. In this article, we will clarify the meaning of […]
We now have a basic understanding of the concept of sustainable growth rate and how it related to the valuation of any given firm. In this article, we will dig deeper in the same formula in an attempt to connect it with the famous Du-Pont model which is used worldwide to predict the Return On […]
Oceans account for over 70% of the surface area of the earth. This makes them important for life as well as for commerce. More than 90% of the international cargo around the world passes through water. Also, millions of people depend upon the ocean for their livelihood. Tourism and fishing and many other such occupations […]
Sears has been one of the largest retailers in the world for many years now. The company has been in operation for about a century. Sears is one of the most widely known corporations in the world. Finally, in October 2018, Sears is now filing bankruptcy. Many investors were already expecting this move given the […]
The business of sports can be asset-intensive and can lead to negative cash flows for a number of years. Sporting franchises have to shell out huge sums of money in order to build new stadiums and also to ensure that the best players are playing for their teams. Also, the legal structure as well as […]
The Gordon growth model is a well known and widely known model for valuing equity securities. However, as with every model, there are some pros and cons that need to be understood before this model is applied. Understanding of these pros and cons will help differentiating between situations wherein it would be prudent to apply the Gordon growth model and situations wherein that would not be the case.
The points in favor of the Gordon growth model i.e. the pros have been listed first:
At the same time, the points against Gordon growth model i.e. the cons are as follows:
As such the Gordon growth model is susceptible to the “garbage in garbage out” syndrome. Even if slightly inaccurate assumptions are used, the results will be way off the mark!
To conclude, it would be apt to say that Gordon growth model has more pros than cons. Analysts must be careful to avoid the pitfalls associated with the use of the model. Overall, it is a handy tool to estimate the value of equity of any company.
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