In the sphere of investment there are quite a fewvarious ways to calculate economic effects. Some of them relate to government bonds, others explore different aspects of the activities of different companies, determining their attractiveness. Still others are proposed as a way of realistic valuation of assets. Of course, there are a number of additional parameters that can be added here, but somehow this later. Now, within the framework of the article, the most interesting question is: what is the Gordon model? Used for what? What simulates, what result shows and how to interpret it? By what formulas is considered?
What is called Gordon's model?
The Gordon model is a variation of the modeldiscounting of dividends, which is used to calculate the price of a share or a business. Its main application was found in the calculation of the value of companies that are not listed on exchanges and which are difficult to assess by other economic instruments. You can also find an expanded name - Gordon's growth model.
What formula?
And how, in fact, to simulate some kind ofsituation? Quite simply - with the help of mathematics. It should be noted that Gordon models can be created under a variety of situations, which, accordingly, will affect the content of the formula. But in order for you to have an idea of what will be discussed, it is suggested to disassemble a rather popular equation created for dividend payments, which will be next year with the condition of increasing them by the size of the average growth rate. So, the Gordon model, the formula:
- DSC = (DVTP x (1 + STRD)): SATM + STRD.
Decoding of abbreviations is as follows:
- DSC - the return on equity of the company.
- DVTP - dividend payments of the current period.
- STRD is the average growth rate of dividends.
- SATM - the value of the stock at the current moment, which Gordon's model estimates.
Calculation example
Моделирование вручную довольно проблематичное и requires a lot of time. Therefore, ancillary environments such as Excel are used extensively. Suppose that one share of Gazprom costs 150.4 rubles. You can see the example calculation below. Formulas, according to which it was considered:
- Expected return on the stock = B20 x (1 + D7): E7 + D7.
- The average annual growth rate of dividends = (B20: B7) ^ (1: 13) - 1.
Why is it necessary?
The Gordon model can be used toto ensure the development of a difficult assessment, when carrying out tax planning, and also during the evaluation of a stock that has an even growth in the dividend on the stock market. Also, the application is effective in such cases:
- Increase in the volume of the market.
- There are stable supplies of raw materials and material resources necessary for production.
- Applied technologies and equipmentare highly efficient, and their replacement is not expected in the next few years, or there are guarantees that the modernization of the latest technology will be carried out in the near future.
- The enterprise has money resources that can be used to improve it.
- There is a stable economic situation.
It should be reported that the dividend forecast foris extremely difficult because of the existence of various economic risks (which are always there, even if before that the enterprise was evaluated and received good feedback on the stability of the business). So, there are quite a few methods of estimating the size of payments, which were aimed at making everything as accurate as possible. Certain restrictions are also imposed. So, Gordon's model is used on the grounds that there will be a stable rate of growth in dividend payments. By the way, this segment of the economy is so specific that its evaluation by other methods is not possible.
Feature of this model
Which features can thismodel? The main and most interesting is that if certain conditions are met, then the equation becomes a full equivalent of the general formula for discounting the flow of monetary units. So, in order to determine the current value of equity for business, it is necessary that all expected cash flows of the period of interest be divided into the difference that arises between the discount rate and the rate of growth. Here it should be reported that at first Gordon was looking for a solution to calculate the profit that can be expected. Therefore, these calculations were first called the "dividend model". But, despite everything, the equation given here is quite general.
By the way, the difference between the discount rate andrate of growth is considered the norm of capitalization. You can also calculate the multiplier (or coefficient) of income. For this, it is necessary to divide the unit by the capitalization rate. Therefore, it is difficult to disagree with the assertion that the Gordon equation is compatible with the general valuation model. To mathematically determine the attractiveness of a business, revenues are generated by a ratio. Due to this property, when accessing the Gordon model, it becomes easier to analyze information about stocks or the state of the entire enterprise / company. The calculations obtained with the help of such formulas can be used to effectively manage the business or to assess its value. Also in the economic literature one can sometimes find such a term as "a growth model".
Restrictions on use
It should be noted that for all theiradvantages The Gordon model has a rather limited scope of use. So, only those companies that currently have stable growth rates can make calculations on it. To correctly use the information obtained, the data to determine the growth rate must be carefully selected.
Ideally fit the Gordon modelcompanies that can boast of their growth, which is equal to the nominal increase in the economy (or have a growth rate less than it). At the same time, it is necessary to have a clear and formulated policy, which relates to dividend payments and which will be held in the future.
Conclusion
In conclusion, one can deduce the importance that this economic tool provides. It should be remembered that it allows you to evaluate enterprises and companies that are not on stock exchanges.
Also quite important is its role forestablish the current status of the organization, as well as planning the level of profitability that is expected in the near future. Also be sure to take into account the realities in which you will use everything. Here are a few formulas for different cases, and if you are interested in this topic - they will be useful in the development of economic disciplines within the university or self-education.
