Page 25 - FINAL CFA II SLIDES JUNE 2019 DAY 7
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READING 29: DISCOUNTED DIVIDEND VALUATION
LOS 29.g: Calculate the value of noncallable fixed-rate
perpetual preferred stock.
MODULE 29.2: GORDON GROWTH MODEL
EXAMPLE: Calculating the value of fixed-rate perpetual preferred stock: United Publishing has a
fixed-rate perpetual preferred stock outstanding with a dividend of 6% (based on an issue at par of
£100). If the investors’ required rate of return for holding these shares is 9.5%, calculate the current
value of these shares.
LOS 29.h: Describe strengths and limitations of the Gordon growth model and justify its selection to value a company’s common shares.
Strengths:
• Is applicable to stable, mature, dividend-paying firms.
• Is appropriate for valuing market indices.
• Is easily communicated and explained because of its straightforward approach.
• Can be used to determine price-implied growth rates, required rates of return, and value of growth opportunities.
• Can be used to supplement other, more complex valuation methods.
Weaknesses:
• Valuations are very sensitive to estimates of growth rates and required rates of return, both of which are difficult to estimate with precision.
• The model cannot be easily applied to non-dividend-paying stocks.
• Unpredictable growth patterns of some firms would make using the model difficult and the resulting valuations unreliable.
