NOTES
1. The Gordon and Gordon model is equivalent to the finite-growth model described by Miller and Modigliani (1961, footnote 15).
2.The numbers in this paragraph come from simulations described in the section titled “The Model and Market Expectations.” These numbers can be recalculated using Equation 8.10 with a required return of 8 percent.
3. A discount rate of 8 percent can be thought of as a real (risk-free) interest rate of 2 percent plus an equity risk premium of 6 percent.
4. Not all studies have found that high-P/E firms underperform. Siegel (1995), for example, found that price appreciation and dividends over a 25-year period ultimately justified the high P/Es of a group of 50 stocks.
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