Calculating Free Cash Flow to the Firm: Method #2: Cash Flow From Operations
February 12, 2025
Businesses rely heavily on technology in order to obtain a competitive advantage. In today’s world, most successful companies have a technological advantage over their competitors. However, just like business strategy, the technological strategy also involves long-term decision-making. Technological advantages are not developed overnight. Instead, they are the result of decision-making over extended periods of time. […]
The freely floating currency system may have its advantages and disadvantages. However, it has fundamentally changed the way we look at currencies. In doing so, it has created one major obstacle. We now compare currencies with one another to check if they have gained or lost value. This way of measurement is bizarre to say […]
People often say that the size of the derivative markets is exploding. It is over $700 trillion dollars a year now and when we put that number into perspective that is over the GDP of all the countries in the world combined in the last 20 years. How can the value of derivatives in one […]
There is no doubt about the fact that the Product as a Service (PaaS) model is being adopted by companies on a large scale. This is because of the various advantages that the model has to offer. These advantages have already been discussed in the previous article. However, just looking at the advantages provides a […]
The money market is a full-fledged financial market. Hence, there are many investors who are keen to hedge the risks which emanate from the money market. The need to hedge these risks has led to the creation of several money market derivatives. There are certain exchange-traded derivatives that are a part of the money market […]
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.
Your email address will not be published. Required fields are marked *