Gordon's model

This presentation covers Gordon's model with the annual report of Bajaj steel company and Tata Consultancy Services.

1. GORDON’S MODEL ABHISHEK STEPHEN. F

2. Definition According to Prof. Gordon , Dividend Policy almost always affects the value of the firm. He Showed how dividend policy can be used to maximize the wealth of the shareholders. The main proposition of the model is that the value of a share reflects the value of the future dividends accruing to that share. Hence, the dividend payment and its growth are relevant in valuation of shares. The model holds that the share’s market price is equal to the sum of share’s discounted future dividend payment.

3. Assumptions Gordon’s model is based on the following assumptions: The firm is an all Equity firm No external financing is available The internal rate of return (r) of the firm is constant. The appropriate discount rate (K) of the firm remains constant. The firm and its stream of earnings are perpetual The corporate taxes do not exist. The retention ratio (b), once decided upon, is constant. Thus, the growth rate (g) = br is constant forever. K > br = g if this condition is not fulfilled, we cannot get a meaningful value for the share.

4. Formula of Gordon’s Model Where, P = Price E = Earning per Share b = Retention Ratio k = Cost of Capital br = g = Growth Rate P = E (1 – b) K - br

5. CALCULATION OF MARKET PRICE PER SHARE BAJAJ STEEL COMPANY LTD – 2013 R=18.95 K=.5 EPS=92.35 DPS=4 ASSUMPTION ORIGINAL DATA LET R BE 15.95% LET R BE .5% PART PAYMENT91.3% 4.5 5.4 184.9 100% RETENTION 4.8 5.7 184.9 100% PAYOUT 4.7 5.5 184.9

6. BAJAJ STEEL COMPANY LTD – 2014 R= 8.09 K=.5% EPS=53.62 DPS=4 ASSUMPTION ORIGINAL DATA LET R BE 4 .09% LET R BE .5% PART PAYMENT 52.62% 6.5 12.8 107.2 100% RETENTION 6.6 13.4 107.2 100% PAYOUT 6.2 13.1 107.2

7. BAJAJ STEEL COMPANY LTD- 2015 R=4.OO K=10.1% EPS=100 DPS=0 ASSUMPTION ORIGINAL DATA LET R BE 2% LET R BE 10.1% PART PAYMENT0.99 0.25 0.52 0.09 100% RETENTION 0.25 .52 0.09 100% PAYOUT 0.21 1.10 0.09

8. DATA INTERPRETATION BAJAJ STEEL According to Gordon’s Model, this company is a declining firm because the r<k (4.00%<10.1%) Since the market price is lower (0.21) as calculated through the Gordon’s formula, the researcher has found that the Gordon’s model is disproved for all the 3 years.

9. CALCULATION OF MARKET PRICE PER SHARE TATA CONSTUTANCY SERVICES- 2014 R=53.39 K=33.09 EPS=66.03 DPS=32.00 ASSUMPTIONS ORIGINAL DATA LET R BE 50.39% LET R 33.09% PART PAYMENT .65 0.01 130 3.7 100% RETENTION 1.23 1.31 3.7 100% PAYOUT 0.01 0.01 3.7

10. TATA CONSTUTANCY SERVICES- 2015 R=52.77% K=79.26% EPS=17.38 DPS=79.00 ASSUMPTIONS ORIGINAL DATA LET R BE 47.77% LET R 79.26% PART PAYMENT 16.3 0.30 0.21 0.20 100% RETENTION 0.32 0.28 0.20 100% PAYOUT 0.312 0.26 0.20

11. TATA CONSTUTANCY SERVICES- 2016 R = 49.34% K=43.56% EPS=62.55 DPS=43.50 ASSUMPTIONS ORIGINAL DATA LET R BE 42.34% LET R 43.56% PART PAYMENT 61.5 1.25 1.45 2763.6 100% RETENTION 3034.4 2601.4 2763.6 100% PAYOUT 3096.9 2666.46 2763.6

12. TATA CONSULTANCY SERVICES According to Gordon’s Model, this is a growth Firm because the r>k (29.34 %> 43.56%) Since the market price is lower (3034.4) as calculated through the Gordon’s model, the researcher has found that the Gordon’s Model is disproved for all the 3 years.

13. Gordon’s model CONCLUSION Thus the researcher has found that the assumptions of the Gordon’s Model are disproved for BAJAJ STEEL and TATA CONSULTANCY SERVICES for all the 3 years, i.e. OUTCOME Able to test Gordon’s Model relevance for two companies Can able to disprove Gordon’s Model for both the companies