What is the effect on valuation when using the Gordon Growth method compared to the Multiples Method?

• A. Always results in a lower valuation
• B. Always results in a higher valuation
• C. Highly dependent on assumptions made
• D. Does not affect the overall valuation

Answer: (C)

The Gordon Growth method, also known as the Dividend Discount Model (DDM), and the Multiples Method are both popular approaches to valuing a company, but they are based on different assumptions and inputs, which can lead to varying outcomes in valuation.

The Gordon Growth method estimates the present value of an infinite series of future dividends that grow at a constant rate. As a result, the valuation is highly sensitive to the growth rate of those dividends and the discount rate applied. If the assumptions regarding growth and the discount rate change, the valuation derived from the Gordon Growth model will also change significantly. Hence, the value derived from this method can vary widely based on the inputs, making it highly dependent on the assumptions made by the analyst.

In contrast, the Multiples Method typically relies on applying a multiple (like EV/EBITDA or P/E ratio) to a company's financial metric, such as earnings or cash flow. This method is generally based on market comparables, which may provide a more stable valuation under certain market conditions but can also be affected by market sentiment and comparable company performance.

Because the valuations derived from both methods can be influenced heavily by the assumptions and inputs used for the Gordon Growth model, it's accurate to say that the effects on valuation