--%>
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 : How can industrial company inflate

    How can any industrial company inflate the value of its inventory so as to decrease net income and the taxes is has to pay in a year?

    		•
  • Q : Variance of a portfolio The variance of

    The variance of a portfolio of 40 stocks will be the addition of _______ variance terms and _______ covariance terms. A) 40; 1560B) 40; 1600C) 80; 40D) 1600; 40

    		•
  • Q : Why classical option pricing required

    Why classical option pricing with constant volatility required?

    		•
  • Q : All rates are stated annually with

    1 Assume the following (all rates are stated annually with semiannual compounding) a. Six Month Spot Rate is 2% b. Six Month Forward rate starting at month six is 2.2% c. Six Month Forward rate starting at month 12 is 2.4% d. Six Month Forward rate starting at mont

    		•
  • Q : Road King Trucks Project I want to know

    I want to know how much do you charge for doing the project?

    		•
  • Q : Problem on exponential growth rate

    Atlanta Company stock is predicted to follow an exponential growth rate. The relationship among the current stock price P0, future price PT after time T, and continuously compounded rate of the return r, is: PT = P0eγT. The stock doesn’t pay any

    		•
  • Q : Define Project Financing Project

    Project Financing: It is the procedure of determining how to go around obtaining the resources needed in managing the costs related with the launch and continuing operation of a project. Whereas this procedure sometimes comprises the re-allocation of

    		•
  • Q : Explain Value Chain Value Chain : The

    Value Chain: The value chain is a theory from business management that was first described and popularized Michel Porter in his 1985 best seller, Competitive Advantage: Creating and Sustaining Superior Performance.

  • Q : Attributes of debt securities What are

    What are the Attributes of debt securities?

    		•
  • Q : Why do a Split Why do a Split?

    Why do a Split?

    		•