Model Documentation
CFA® Level II Topic: Equity Valuation (Multistage DDM/FCFE)
01. The Reverse Engineering Logic
In a standard valuation exam question, you are given assumptions to calculate Intrinsic Value ($V_0$). This tool performs the inverse operation: Market Implied Valuation.
It treats the Current Stock Price ($P_0$) as the "Truth" and iterates to find the specific growth rate ($g$) required to justify that price, given your Cost of Equity ($K_e$) constraints.
02. Critical CFA Exam Mechanics
A classic exam error is applying the discount factor to the wrong cash flow.
*Our tool's "Mode" toggle automatically adjusts the starting point of the geometric series.
The Gordon Growth formula yields value at time n, not time 0. It must be discounted back n periods.
let cf_next = cf_n * (1 + g_term); // CF(n+1)
let tv_at_n = cf_next / (r - g_term);
let pv_tv = tv_at_n / (1+r)^n;
Warning: Never use CF(n) in the numerator for TV.
03. The "Impossible" Growth Warning
The Gordon Growth Model (GGM) relies on a geometric series convergence. It is mathematically impossible for the perpetual growth rate ($g$) to equal or exceed the discount rate ($r$).
Model Breakdown Condition
If the stock price is too high relative to cash flows, the solver may push $g$ towards $r$. In the real world, this implies the market is pricing in a multi-stage high-growth period significantly longer than the 5 years set in your model, rather than a mathematical impossibility.
"The value of a model is not in the number it produces, but in the assumptions it forces you to confront."