--%>
Assignment Help - homework help

Why required return cannot computed by Gordo Shapiro model

Why can we not compute the required return (Ke) by the Gordon-Shapiro model [P0 = Div0 (1+g) / (Ke – g)] in place of using the CAPM? As we identify the current dividend (Div0) and the current share price (P0), we can acquire the growth rate of the dividend by the formula g = ROE (1–p)/(1 – ROE (1–p)), p being the payout.

E

Expert

Verified

Book data (past information) contain no relation to market data (depends on future expectations). The growth within the Gordon-Shapiro formula is the expected one and this does not have much to do with historical data. In Gordon-Shapiro equation, there are two variables that are unknown: Ke and g. We can compute pairs (Ke, g) that satisfy the equation, but we can’t say such that one of them is “the right one”.

   Related Questions in Corporate Finance

  • Q : Walt disney WAAC You work in Walt

    You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team meeting later today....?

    		•
  • Q : Which parameter good measures value

    Which parameter good measures value creation; the Economic Value Added (EVA), the CVA (Cash Value Added) or the economic profit?

    		•
  • Q : Explain Financial Management Financial

    Financial Management: It means organizing, planning, directing and controlling the financial activities like procurement and use of funds of enterprise. This means exerting general management principles to the financial resources of enterprise. <

    		•
  • Q : Is Capital Cash Flow identical with

    Is Capital Cash Flow identical with Free Cash Flow?

    		•
  • Q : What are Stock exchanges Stock

    Stock exchanges: A stock exchange provides services useful for trading, issue and redemption of shares and other securities for traders and brokers. They will also provide facility for payment of income and dividends for listed securities. Securities

    		•
  • Q : Financial problem regarding acquistion

    My Company paid an extremely higher price for the acquisition of other company; the price was recommended through the valuation of an investment bank. Now we have financial problems. So is there any way to make this bank legally responsible for such situation?

    		•
  • Q : Explain usual value of the sales of net

    Does the usual value of the sales and of the net income of Spanish companies have anything to do along with sustainable growth?

    		•
  • Q : Shall we use the arithmetic mean or the

    The market risk premium is the difference between the historical return on the stock market and the return on bonds. But how many years does “historical” imply? Shall we use the arithmetic mean or the geometric one?

    		•
  • Q : Which data is the most suitable for

    Which data is the most suitable for finding betas?

    		•
  • Q : Market for Corporate Bonds Write some

    Write some point regarding Market for Corporate Bonds.

    		•