Valuation of McPherson's Limited using Gordon Growth Model

This article discusses the valuation of McPherson's Limited using the Gordon Growth Model. It explains the intrinsic value of the share and whether it is overvalued or undervalued. The article also highlights the limitations of the model and suggests other techniques for valuation. The subject is Corporate Finance and the course code is not mentioned. The article is relevant for students studying finance or investors interested in McPherson's Limited. The article does not mention any specific college or university.

Corporate Finance
Analysis

McPherson’s limited is the Australian based company, which is engaged in the products related
with the household goods, beauty, and personal care products. The company set up its operation
in Australia, New Zealand and Asia (Annual report of McPherson, 2018). Further, the company
finances its operations from the internal sources such as retained earnings as well as from the
external sources such as by issue of shares, debt and so on. Along with this company is
improving its financial position by the investing in the product innovation techniques and the
new market.
The investment decision of any investor is influenced by the value of the share of the company
as well as the debt position of the company (Michaely, and Qian, 2017). MCP limited making
many strategies for maintaining the optimal capital structure of the company, which leads to
enhancing the growth of the company along with the growth of the shareholders of the company.
For evaluating the investment decision, equity valuation method is very good technique, by
which an investor can get to know about the value of the share available for the owner or the
shareholders of the company (Yu, Assad, and Fuller, 2016). There are various techniques of the
equity valuation method, Gordon Growth method is one of the techniques, which assists the
intrinsic value of the share based on the constant rate of the growth of the future dividend of the
company. Gordon Growth Model assumes the company makes the payment of the dividend at
the constant growth rate to the equity shareholders (Kung, and Schmid, 2015).
VALUATION OF THE COMPANY
Gordon growth model
By applying the Gordon growth model technique the value of the share of McPherson’s limited
can be estimated reliably since the dividend growth rate of the company is almost stable. Further,
this technique does not affect by the market condition, which leads to an easy comparison
between the companies of different size and different industries. Apart from this, it is a very
common tool which can be applied by an investor for valuation of the shares so that they can
take their decision regarding whether the investment in the company is beneficial to them or not.
In this method, the Value of the share depends on the future dividend of the company, the rate of
return of the company and the growth rate of the company (Jagannathan, and Liu, 2015).

Intrinsic Value = D1 / (Ke – g)
Here
D1= expected annual dividend per share of the next year
Ke= expected the rate of return
G= expected dividend growth rate
In the case of McPherson’s limited
D1= 8.5
G= 6.25%
Ke = 15%
The intrinsic value of the McPherson’s limited by applying the above formula will be
8.5/ 15-6.25
= $ .971
In the above calculation D1, represents the dividend of the next year, therefore the D1 is the
dividend of the year 2018 that is 8.5 per share. Further G represent the growth of the dividend,
that is in the year 2017, the company paid dividend of 8 per share and in the year 2018, the
dividend is 8.5, therefore the growth rate is equal to the (8.5-8)/8= 6.25% (McPherson, 2018)
However, the actual market price as on 30 June 2017 was $ 1.30 (Market index, 2018)
On the basis of the above calculation, it has been seen that the actual market price of the share of
the McPherson’s limited was more than the intrinsic value of the share of the company, which
leads that the share of the McPherson’s limited was overvalued. Therefore as an investor, it is not
good to purchase the share of the company when it is overvalued. The goal of the investor is to

buy the shares at the time when the price of the stock is lower and sell the share at the higher
price. Therefore it is recommended that the investment in the McPherson’s limited will not be a
good decision for the investor. However by analyzing the book value of the shares, price to book
ration and many more aspect, an investor can make the more accurate decision for the investment
purpose.
Since the Gordon Growth model is based only on the income from the dividend, it does not
consider the other aspect of the income such as the capital gain, which can be earned by the
investor from making the investment in the company. The basic assumption of this model is to
the valuation of the shares of the company only through the return of the investment achieved by
the shareholders by the dividend income. Further another assumption is that the growth rate of
the dividend paid by the company is constant, however, in the practical situation, it may not be
possible that the growth rate remains the same in the next year (Brightman, Masturzo, and Beck,
2015). Therefore the incorrect estimation may lead to the wrong overvaluation or undervaluation
of the share price of the company, by which investor may not take proper decision. Overall it is
a very traditional method of the valuation of the stock. There is another technique of valuation of
the share of the company, which is better than the above method such as the comparable method,
discounted cash flow models and so on; by applying these techniques investor may get the better
decision.

REFERENCES
Annual report of McPherson, 2018. Available through<
https://www.mcphersons.com.au/sites/default/files/MCP%20Annual%20Report%20-
%20Website.pdf>. [Accessed on 28th September 2018].
Brightman, C., Masturzo, J. and Beck, N., 2015. Are Stocks Overvalued? A Survey of Equity
Valuation Models. Research Affiliates Fundamentals.
Jagannathan, R. and Liu, B., 2015. Dividend dynamics, learning, and expected stock index
returns (No. w21557). National Bureau of Economic Research.
Kung, H. and Schmid, L., 2015. Innovation, growth, and asset prices. The Journal of
Finance, 70(3), pp.1001-1037.
Market index, 2018. Available through< https://www.marketindex.com.au/asx/mcp>. [Accessed
on 28th September 2018].
McPherson, 2018. Available through<
https://www.intelligentinvestor.com.au/company/mcpherson%27s-12084/dividends>. [Accessed
on 28th September 2018].
Michaely, R. and Qian, M., 2017. Stock liquidity and dividend policy: dividend policy changes
following an exogenous liquidity shock. Routledge.
Yu, G., Assad, J.C. and Fuller, P., 2016. Using a Modified Dividend Discount Model for Stock
Market Games. Sage.