Gordon Growth Model

Question 1

What is the companies retention rate?

Answer 1

Retention rate = 1 - 0.63 = 37%

Retention rate = 1 - dividend payout ratio

Question 2

What is the Gordon Growth Model?

Answer 2

Calculates the intrinsic value of a stock based on a future series of dividends that growth at a constant rate.

The assumption is that dividends grow at a constant rate in perpertuity, the model solves for the present value of the infinite series of future dividends.

Question 3

What is the expected rate of return for the company below?

Question 4

What is the price to earnings multiple?

Answer 4

PE = Payout / (k-g)

k = required rate of return

g = growth rate of dividends

Question 5

What is the equity risk premium?

Answer 5

Risk premium = forward looking dividend yield + long term earnings growth rate - current long run gilt yield

or

Expected return = risk free rate + equity risk premium

2% + 4% = 2% + ?

Equity risk premium = 4%