Valuation of McPherson's Limited using Gordon Growth Model

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).