Hello Everyone,
Recently, I reviewed a valuation report with a sensitivity analysis matrix. Such a matrix is a common feature in valuation reports.
This time I looked at it a little differently, thinking about the relationship between the expected cost of capital and expected growth. The traditional interpretation of this matrix, taken from the valuation and edited to disguise the real numbers and shown below, gives the range as the best case to worst case range, where best case is high growth and low discount rate, and worst case is high discount rate and low growth.
The Gordon Growth Model suggests that r and g are related: r = (D1 / P) + g. If they are related and the Gordon Growth Model reflects an expectation, would a more reasonable range be read along the diagonal from lower right to upper left?
Please let me know your thoughts.
Dan McConaughy...
