Calculating Free Cash Flow to the Firm: Method #2: Cash Flow From Operations
February 12, 2025
Concept of Carry Trade Carry trade is a kind of trade that is peculiar to the Forex market. In other markets, traders trade with the intention of benefitting from capital appreciation. However, in case of carry trade, traders have two expectations. They want to earn cash from capital appreciation as well as from the interest […]
Bank runs have been part of the banking industry for a long time. This is an unintended consequence of the fractional reserve banking system which is followed by the banking industry across the globe. Bank runs were common during the 1920s when the Great Depression took place. However, with the passage of time, the banking […]
The disclosure statement is a legal document which every company undergoing bankruptcy in the United States is expected to create and share with its stakeholders. The disclosure statement is often considered to be a fundamental document. It is often compared to the prospectus, which is issued by companies before they solicit investors during an initial […]
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The retail sector has been under significant financial distress in the recent past. An alarmingly large number of retail companies are facing bankruptcy proceedings in courts across the world. However, it needs to be understood that bankruptcy proceedings and liquidations are not a preferred solution for creditors either. Before creditors initiate bankruptcy, they generally try […]
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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