Sometimes, it’s a good idea for Wall Street analysts to include some extremely complicated topics in their research reports to clients. For one, if the client doesn’t understand it, then they might conclude that the analyst is really smart and deserves a 6+ figure salary. If the client does understand it, then he/she can give himself a nice pat on the back.
Goldman Sachs’ US Monthly Chartbook, which is published by the firm’s Portfolio Strategy Research team, has this intellectually tasty slide.
For many, it can be rather intimidating. But anyone who has been able to get through the equity valuation section of the CFA level 2 exam should have absolutely no problem with this.
(Of course, anyone who did make it through CFA level 2 will note that the Gordon Growth Model being employed here is extremely sensitive to r and g. Furthermore, dividend discount models in general are not useful for valuing entities that don’t pay dividends. And let’s not bother getting into the assumptions that go into the capital asset pricing model used to derive the cost of equity.)
Photo: Goldman Sachs