A community for students.
Here's the question you clicked on:
 0 viewing
anonymous
 5 years ago
what happens if in a gordon valuation the growth is greater than the cost of equity? I get a negative valuation. what do I
do?
anonymous
 5 years ago
what happens if in a gordon valuation the growth is greater than the cost of equity? I get a negative valuation. what do I do?

This Question is Closed

anonymous
 5 years ago
Best ResponseYou've already chosen the best response.0You could try to forecast more yearly cash flows, and then discount them using your cost of equity. I guess you could also ask yourself this question: is my projected growth a valid estimate? The object that you are valuating cannot have a rather high growth factor for ever. Sooner og later it will decline. Remember: as your denominator moves toward zero, the present value at time t gows toward infinity

anonymous
 5 years ago
Best ResponseYou've already chosen the best response.0In normal terms the growth you are projecting should not be higher than the riskfree rate what means that it cannot exceed the cost of equity. Otherwise the company in the long term will be likely to be bigger than the economy as a whole.... So, as Hoel suggested think of extending the high growth period before pushing down the growth rate toward the riskfree rate during the stable period.

anonymous
 5 years ago
Best ResponseYou've already chosen the best response.0thanks a lot :) So to sum up, I need to average out the growth I think the company will have from now to infinity? or should I divide the gordon formula into 2 periods somehow?

anonymous
 5 years ago
Best ResponseYou've already chosen the best response.0Yes, I would "average out" the growth that I think the company will have, by extending the budgeted cash flows. Therefore, you should perhaps do a "threestage growth"model analysis. See "Equity Asset Valuation" by Pinto et al. 2010, page 192. I'm guessing Professor Damodaran also have something on the subject.
Ask your own question
Sign UpFind more explanations on OpenStudy
Your question is ready. Sign up for free to start getting answers.
spraguer
(Moderator)
5
→ View Detailed Profile
is replying to Can someone tell me what button the professor is hitting...
23
 Teamwork 19 Teammate
 Problem Solving 19 Hero
 Engagement 19 Mad Hatter
 You have blocked this person.
 ✔ You're a fan Checking fan status...
Thanks for being so helpful in mathematics. If you are getting quality help, make sure you spread the word about OpenStudy.