Finance

Question 1

What are the limitations of the gordon growth model

Answer 1

Model relies on accounting profit - distorted
It assumed that b and r remain constant
Can be distored by inflation
Relies on historic information
Assumes all new finance is from equity or that gearing is held constant

Question 2

What does the gordon growth model assume

Answer 2

Believes that dividend growth is a function of the proportion of earnings ploughed back into the company and the rate of return earned on those reinvested funds