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Dividend growth model Essay

This is the Gordon’s growth model which assumes that the dividends of a company is constant such that the value of stock will be determined as follows PepsiCo P/E ratio of 19. 94 times shows that it is a highly valued stock. PSR should be high also.

Unless the company is facing bankruptcy, such that its revenues decline substantially, PSR should be high. Companies with market to book values higher than 1 are overvalued. PepsiCo has a market to book value of 11. 20. This therefore means that the market overvalues its stock. Price to divided ratio is the inverse of dividends yield. It shows the percentage of dividends relative to its market price. High price to dividend ratio indicates that the market undervalues the Company’s stock while a low ratio shows that the shares are overvalued.

PepsiCo Inc, price to dividend ratio is 52. 55. This is high. The cost of capital is basically equated to the level of returns expected by the investors. Therefore the cost of capital is determined by the component cost of capital. Equity forms a large part of the capital structure of any company. Higher cost of equity means high cost of equity. There are two

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common methods of determining the cost of equity, the CAPM and the Gordon’s Dividend growth model. The two methods, however, lead to varying results.

Overall conclusion The company’s overall performance is above that of the industry. This is shown by its profitability average and liquidity ratios. The company also has a high market share only second to Coca Cola company. The company is therefore a worth investing in given its strong financial position.

References: Yahoo Finance (2008). PepsiCo, Inc. Retrieved on 26/4/2008 from http://finance. yahoo. com/q/ae? s=PEP Google Finance (2008). PepsiCo, Inc. Retrieved on 26/4/2008 from http://finance.google. com/finance? q=NYSE%3APEP Hoovers (2008).

Beverage industry. Retrieved on 29/4/2008 from http://www. hoovers. com/beverage-manufacture-and-bottling-/–ID_164–/free-ind-fr-profile-basic. xhtml Infinancials (2008). PepsiCo, Inc. Retrieved on 29/4/2008 from http://www. infinancials. com/Eurofin/control/company? view=peergroup&company_id=30076NU&type=0&nbrdm=65973 PepsiCo. Company overview. Retrieved on 21/4/2008 from http://www. pepsico. com/PEP_Company/index. cfm

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