Free download of an improvement to the Gordon growth model

BVWireIssue #202-1
July 10, 2019

valuation method
gordon growth model, discounted cash flow (DCF), growth rate, cash flow projections

One of the benefits of attending BV conferences in person is that you can also pick up some interesting things outside the formal sessions, such as during networking events, in the exhibit hall, or in the local watering hole after a long day. At the recent NACVA conference in Salt Lake City, Mike Adhikari (Illinois Corporate Investments Inc. and Business ValueXpress Software), a valuation and M&A advisor, was set up right next to our BVR booth in the exhibit hall. We watched as he unveiled his Capitalization 2.0 methodology, which is designed to improve on the simple Gordon growth model (GGM). A lot of attendees converged on Adhikari’s booth where he gave a live demonstration of Capitalization 2.0, which uses a newly developed advanced growth model (AGM) formula. GGM assumes that the capital structure of the business will remain constant and that the debt principal will never be repaid. Because of this, GGM can overvalue a business by 10% to 50%, according to Adhikari. AGM considers that, even when the business is growing at a constant rate, the debt principal may have to be paid down, and hence the capital structure will change. Unlike the GGM formula, the AGM formula is complex, so Adhikari offers a spreadsheet of the AGM formula that can be downloaded (free for a limited time) from his website, Your feedback on this model is welcome!
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