Calculating Free Cash Flow to the Firm: Method #2: Cash Flow From Operations
February 12, 2025
Accounts receivable are a very important part of the current assets of any business. Like inventory, accounts receivable are considered a necessary evil to do business. Large companies hardly conduct any transactions on cash basis with their wholesalers and distributors. The transactions are largely conducted on credit and therefore lead to the existence of accounts […]
Financial models are used by corporations almost every day. These models help while making several key strategic decisions. For instance, if a company plans to enter a new country or even take over another company, it is likely that it will create a financial model first. This model is a way of generating “What-If” information […]
The bankruptcy process takes a long period of time to resolve. During this time frame, the company takes the protection of the legal system. The legal system makes provisions for discharging the previous claims on the assets of the company in a fair and equitable manner. However, the bankruptcy process is quite complex. It has […]
In the previous article, we have already been introduced to the concept of debt ceiling as well as the various types of debt ceilings. It is important to note that the debt ceiling strategy has some advantages as well as disadvantages. It is important to understand the details of both before implementing it. In this […]
Traditionally, the commercial banking industry was largely controlled by commercial banks which had a huge brick-and-mortar presence. However, over the past few decades, customers have gone digital. In response to that, the banks were also compelled to go digital. This digital wave led to a dramatic increase in competition for commercial banks. Many types of […]
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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