A B C D E

1 THE GORDON MODEL COST OF EQUITY

2 Current share price, P0 60 Po 106
3 Current dividend, D0 3 Do 5
4 Anticipated dividend growth rate 12% Gc 7%
5 Gordon model cost of equity, rE 17.60% Ke 12.047%
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7
8 consider a firm whose current dividend is
9 Div0 = $3 per share and whose share price is P0 = $50. Suppose the
10 dividend is anticipated to grow by 12 percent per year. Then the firm’s
11 cost of equity rE is 17.6 percent:
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 ABC CORP.
Current stock price, P0 50
Current dividend, D0 3 11.300%
Dividend growth rate, g 5%

Cost of equity from Gordon model 11.300% #VALUE! 11.300%

 A B C D E

1
COMPUTING KELLOGG'S rE
WITH THE GORDON MODEL
2 Kellogg stock price, P0, 30 May 2006 48.28 Po 48.28
3 Current dividend
4 Quarterly 0.278 QTRLY Do 0.278
5 Annualized dividend, Div0 1.112 ANNUAL Do 1.112
6 Dividend growth rate, g
7 Last 5 years 1.90% Gc (Last 5 Years)
8 Last 10 years 3.61% Gc (Last 10 Years)
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10 Gordon model cost of equity rE Ke
11 Using last 5 years' growth 4.25% Using Last 5 Year Growth Data
12 Using last 10 years' growth 6.00% Using Last 10 Year Growth Data
 F G H I J

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7 1.90%
8 3.61%
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Last 5 Year Growth
11 Data 4.25%
Last 10 Year Growth
12 Data 6.00%
 A B C D

1 ABC, CASH FLOW TO EQUITY, 1995-2000

Repurchase of
2 Year ending Dividends Stock issues
common stock
3 31-Dec-95 595,722,179 190,722,179 -343,277,821
4 31-Dec-96 742,722,179 200,123,678 -380,277,821
5 31-Dec-97 905,722,179 300,652,710 -456,277,821
6 31-Dec-98 1,073,722,179 257,978,125 -500,277,821
7 31-Dec-99 1,247,722,179 257,978,125 -452,277,821
8 31-Dec-00 1,492,722,179 290,871,409 -618,277,821
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10 End 2000 equity data
11 Stock price 44
12 Number of shares 2,113,456,281
13 Equity value 92,992,076,364 Market Value of Equity
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15 Equity cash flow, end 2000 1,165,315,767
16 Future growth rate
17 Based on 5-year growth rate 21.33%
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19 Gordon cost of equity, rE
20 Based on 5-year growth rate 22.85%
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22 Note: Stock issues are proceeds from issuance of stock options (most to employees)
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26 For x-axes on graph y-axes
27 35,064 1,492,722,179
28 #REF! -618,277,821
 E F G H I J

EQUITY, 1995-2000
1

Cash flow to Year on year

2
equity growth
3 443,166,537 #VALUE!
4 562,568,036 26.94%
5 750,097,068 33.33%
6 831,422,483 10.84%
7 1,053,422,483 26.70%
8 1,165,315,767 10.62%
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 K L M N O P Q

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 A B C D

1 JOHNSON & JOHNSON, CASH FLOW TO EQUITY, 1995-20

Repurchase of
2 Year ending Dividends Stock issues
common stock
3 31-Dec-95 827,000,000 322,000,000 -112,000,000
4 31-Dec-96 974,000,000 412,000,000 -149,000,000
5 31-Dec-97 1,137,000,000 628,000,000 -225,000,000
6 31-Dec-98 1,305,000,000 930,000,000 -269,000,000
7 31-Dec-99 1,479,000,000 840,000,000 -221,000,000
8 31-Dec-00 1,724,000,000 973,000,000 -387,000,000
9 31-Dec-01 2,047,000,000 2,570,000,000 -514,000,000
10 31-Dec-02 2,381,000,000 6,538,000,000 -390,000,000
11 31-Dec-03 2,746,000,000 1,183,000,000 -311,000,000
12 31-Dec-04 3,251,000,000 1,384,000,000 -642,000,000
13 31-Dec-05 3,793,000,000 1,717,000,000 -696,000,000
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15 End 2005 equity data
16 Stock price 61.07
17 Number of shares 3,119,842,000
18 Equity value 190,528,750,940 Market Value of Equity
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20 Equity cash flow, end 2005 4,814,000,000
21 Future growth rate
22 Based on 10-year growth rate 16.59% 0.165930687
23 Based on 5-year growth rate 15.82%
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25 Gordon cost of equity, rE
26 Based on 10-year growth rate 19.54%
27 Based on 5-year growth rate 18.75%
 E F G H I J K

FLOW TO EQUITY,
1 1995-2005
Cash flow to Year on year
2
equity growth
3 1,037,000,000 #VALUE!
4 1,237,000,000 19.29%
5 1,540,000,000 24.49%
6 1,966,000,000 27.66%
7 2,098,000,000 6.71%
8 2,310,000,000 10.10%
9 4,103,000,000 77.62%
10 8,529,000,000 107.87%
11 3,618,000,000 -57.58%
12 3,993,000,000 10.36%
13 4,814,000,000 20.56%
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 L M N O P Q R

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 A B
1 THE GORDON MODEL WITH TWO GROWTH RATES
2 Current dividend, Div0 6.00
3 Growth rate g1, years 1-m ("supernormal") 28%
4 Growth rate g2, years 6 - ¥ 6%
5 Number of supernormal growth years, m 5
6 Cost of equity 16%
7
8 Dividend valuation
9 PV of supernormal growth years
10 Using Excel NPV 40.70
11 Check: Using book formula 40.70
12 PV of normal growth years, after year 5 104.04
13 Share value 144.74
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Anticipated
15
Year dividend
16 1 7.68
17 2 9.83
18 3 12.58
19 4 16.11
20 5 20.62
21 6 21.85
22 7 23.16
23 8 24.55
24 9 26.03
25 10 27.59
26 11 29.24
27 12 31.00
28 etc. etc.
 C D E F G
DON MODEL
1 WITH TWO GROWTH RATES
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13 If current share price is 130 what should be our decision
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 H I J K
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 A B
1 THE GORDON MODEL WITH TWO GROWTH RATES
2 Current dividend, Div0 8.00
3 Growth rate g1, years 1-m ("supernormal") 35%
4 Growth rate g2, years 6 - ¥ 8%
5 Number of supernormal growth years, m 5
6 Cost of equity 18%
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8 Dividend valuation
9 PV of supernormal growth years
10 Using Excel NPV 60.99
11 Check: Using book formula 60.99
12 PV of normal growth years, after year 5 169.35
13 Share value 230.33
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Anticipated
15
Year dividend
16 1 10.80
17 2 14.58
18 3 19.68
19 4 26.57
20 5 35.87
21 6 38.74
22 7 41.84
23 8 45.19
24 9 48.80
25 10 52.71
26 11 56.92
27 12 61.48
28 etc. etc.
 C D E F G
DON MODEL
1 WITH TWO GROWTH RATES
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 H I
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 A B C D E

1
WACHOVIA BANK--DIVIDENDS, STOCK ISSUED AND STOCK REPURCHA
Does historical growth overstate the cost of equity?
Common
2 Common Total Dividend stock Total equity
stock issued payments repurchased cash flow
3 1991 16,462,000 150,730,000 1,215,000 135,483,000
4 1992 29,717,000 170,756,000 31,197,000 172,236,000
5 1993 24,961,000 191,488,000 98,804,000 265,331,000
6 1994 25,339,000 210,503,000 52,908,000 238,072,000
7 1995 24,115,000 235,495,000 65,032,000 276,412,000
8 1996 25,826,000 254,458,000 376,716,000 605,348,000
9 1997 59,281,000 327,303,000 532,682,000 800,704,000
10 1998 80,375,000 381,798,000 531,122,000 832,545,000
11 1999 59,478,000 418,447,000 634,623,000 993,592,000
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13 Compound growth rate 17.42% 13.61% 118.65% 28.28%
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Cost of capital using the Gordon Model
15
Using total equity payout and total equity value
16 End 1999 stock price 68.00
Number of shares
17
outstanding, end 1999 202,795,000
18 Future dividend growth, g? 28.28% #VALUE!
19 End 1999 equity value, P0 13,790,060,000 Market value of equity

20 Projected next total

equity cash flow, D1 1,274,598,774 #VALUE!

21 Gordon model cost

of equity, rE 37.52% #VALUE!
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Shares Total equity
27 outstanding, Dividend per payout
annual average share per share
28 169,841,000 0.89 0.80
29 170,673,000 1.00 1.01
30 172,273,000 1.11 1.54
31 172,339,000 1.22 1.38
32 170,635,000 1.38 1.62
33 167,255,000 1.52 3.62
34 198,290,000 1.65 4.04
35 205,058,000 1.86 4.06
36 202,795,000 2.06 4.90
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 A B C D E
38 11.12% 25.47%
 F G H I

AND STOCK 1
REPURCHASED
e cost of equity?

3 #VALUE!
4 27.13%
5 54.05%
6 -10.27%
7 16.10%
8 119.00%
9 32.27%
10 3.98%
11 19.34%
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13 #VALUE!
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 J K L M N

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 A B
1 WACHOVIA, TWO-STAGE GORDON MODEL
2 End-1999 equity value, P0 13,790,060,000
3 End 1999 total equity payout 993,592,000
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5 High growth rate, ghigh 28.28%
6 Number of high-growth years, m 3
7 Normal growth rate, gnormal 4%
8

9 Cost of equity, rE
using the function TwoStageGordon #VALUE!
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13 Ke 17.251%
14 V 1,087,066,452.11
15 V1
 C D E F
O-STAGE GORDON
1 MODEL Current Price per Share
2 No. SoS
3 MV of Shares OS
4 Equit CF
5 Gs1
6 Gc
7 Super Normal years
8 Ke #VALUE!

9
#VALUE!
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14 1,189,334,728.24 1,301,224,127.60 10,212,434,692.05 13,790,060,000.00
15 V2 V3 V4 V
 G
1 68
2 202,795,000.00
3 13,790,060,000.00
4 993,592,000.00
5 28.28%
6 4%
7 3.00
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