2007-2009 financial crisis and the stock market. The subprime financial crisis that started in August 2007 led to one of the worst bear markets in the last 50 years. Our analysis of stock price valuation, again using the Gordon growth model, can help us understand how this event affected stock prices. The subprime financial crisis had a major negative impact on the economy leading to a downward revision of the growth prospects for U.S. companies, thus lowering the dividend growth rate (g) in the Gordon model. The resulting increase in the denominator in Equation 5 would lead to a decline in P0 and hence a decline in stock prices. Increased uncertainty for the U.S. economy and the widening credit spreads resulting from the subprime crisis would also raise the required return on investment in equity. A higher ke also leads to an increase in the denominator in Equation 5, a decline in P0, and a general fall in stock prices. In the early stages of the financial crisis, the decline in growth prospects and credit spreads were moderate and so, as the Gordon model predicts, the stock market decline was also moderate. However, when the crisis entered a particularly virulent stage credit spreads shot through the roof, the economy tanked, and as the Gordon model predicts, the stock market crashed. Between January 6, 2009, and March 6, 2009, the Dow Jones Industrial Average fell from 9,015 to 6,547. Between October 2007 (high of 14,066) and March 2009 the market lost 53% of its value. Within a year the index was back over 10,000.