Example: Applying the Gordon Growth Model

An analyst obtained the following information regarding Global Shipping Inc.:

Current share price $=$$$28$

Recent dividend per share $=$$$1\mathrm{.}95$

Earnings per share $=$$$4\mathrm{.}25$

Return on equity $(ROE)=15\%$

Required rate of return or cost of equity $=20\%$

Use the Gordon growth model to estimate Global Shipping's intrinsic value. The question requires $4$ answers. Use two decimal places!

First, calculate the retention rate$[$retentionrate$].$ Input the answer as a percentage with two decimal places.

Second, calculate the constant growth rate, g$.[$growthrate$].$

Third, what is the intrinsic value for the company? $[$intrinsicvalue$].$

How much does the dividend growth assumption add to the intrinsic value estimate$[$growthassumption$]?$ Here, assume growth is $0,$ and use the equation Value $=\frac{D_o}{k}-g.$

Show your work on these $4$ questions.

Last think to think about. No input needed. Based on the intrinsic value estimate, is the company's shares undervalued, fairly valued, or overvalued?