⏱ Reading Time: 3 Minutes 4 Seconds

Happy Tuesday, future bankers!

Hope everyone is doing well! Today we’re covering the Gordon Growth Model, your investment history, and Microsoft’s latest AI investment.

🚀 Let’s get into it.

🔢 Technical Question

What is the Gordon Growth Model? When is it used?

What is the Gordon Growth Model?

• A Valuation Tool: The Gordon Growth Model is a type of dividend discount model (DDM) used to calculate the intrinsic value of a company's stock.

• Premise: It assumes that the stock's value is equal to the present value of all its expected future dividends, growing at a constant rate, and discounted back to today.

• Key Assumptions:

  • The company exists in perpetuity: It will continue to operate forever.

  • Constant dividend growth: Dividends grow at a stable, consistent rate into the future.

The Gordon Growth Model Formula

Stock Price = (Dividend per Share in the Next Period) / (Required Rate of Return - Dividend Growth Rate)

Where:

• Dividend per Share in the Next Period: The expected dividend to be paid out by the company in the next year.

• Required Rate of Return: The minimum return investors expect to earn for holding the stock (taking into account the risk of the investment).

• Dividend Growth Rate: The expected annual rate at which the company's dividends will increase.

When is the Gordon Growth Model Used in Investment Banking?

• Mature Companies: It's best suited for stable, mature companies with a predictable history of dividend payments and a relatively well-defined expected growth rate in dividends. Examples would be large utility companies or blue-chip stocks.

• Comparable Analysis: Investment bankers may use the GGM to get a sense of a company's relative valuation compared to similar companies in the industry.

• Mergers & Acquisitions (M&A) Analysis: In some cases, the model can be used in M&A valuations to get a theoretical baseline value for a target company.

• Quick, Simplified Valuations: Since the GGM is relatively simple, it can offer a quick ballpark estimate of a stock's potential value.

Limitations of the Gordon Growth Model

• Sensitivity to Inputs: The results are highly dependent on the growth rate and required rate of return. Small changes in these inputs can significantly impact the determined value.

• Not Suitable for All Companies: It's not ideal for young, high-growth companies that don't have established dividend patterns or where the growth rate is difficult to predict.

• Ignores Market Factors: The GGM doesn't consider current market conditions, investor sentiment, or other factors that can influence stock prices in the short term.

🗣 Behavioral Question

Have you ever purchased any stocks? What was your rationale or thesis for them?

Best Practices

• Honesty and Transparency: Be honest about your investing experience (or lack thereof). Interviewers understand interns may have limited experience in direct investing. If you haven't purchased stocks, don't try to invent something—use this opportunity to show your intellectual curiosity and potential.

• Demonstrate Your Thought Process: Even if you didn't invest, showcase how you would approach identifying an attractive investment. Emphasize the following:

  • Company/Industry Interest: Talk about a company or industry that intrigues you and explain why.

  • Research: Discuss where you'd gather information to assess a potential stock purchase (e.g., company filings, research reports, financial news).

  • Fundamental Analysis: Describe the key metrics you would consider (e.g., valuation multiples, company financials, market position).

• Risk and Reward: Briefly outline how you'd weigh potential risks and rewards, even if this is just a hypothetical exercise.

• Passion: Let your interest in the financial markets shine through. Interviewers don't just want to see knowledge, they want to see your genuine interest and proactive learning.

🗞 Industry News

💰 Microsoft’s $2.9B AI Investment

Microsoft is making waves in Japan with a whopping $2.9 billion investment over the next two years. This investment, the company’s largest in the country, aims to enhance its hyperscale cloud computing and artificial intelligence infrastructure. The announcement came after a meeting between Microsoft President Brad Smith and Japanese Prime Minister Fumio Kishida in Washington. Microsoft also plans to expand its digital training programs, aiming to equip over 3 million people with AI skills in the next three years.

Read more about this story below.

Thanks for tuning in today! Best of luck to everyone working through recruiting right now. If you sign an offer, reply to this email and let us know about it! Like seriously, do it—we’d love to hear about it!