Gordon Growth Model


DEFINITION of 'Gordon Growth Model'

A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends.


Gordon Growth Model

D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)


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BREAKING DOWN 'Gordon Growth Model'

Because the model simplistically assumes a constant growth rate, it is generally only used for mature companies (or broad market indices) with low to moderate growth rates.

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  1. How is a company's share price determined?

    A company's share price is theoretically determined by the summation of the company's expected future dividends as calculated ... Read Full Answer >>
  2. How can I use the Dividend Discount Model (DDM) effectively for a stock with fluctuating ...

    The dividend discount model (DDM), also known as the Gordon growth model, assumes a stock is worth the summed present value ... Read Full Answer >>
  3. What kinds of companies are the best candidates for evaluation using the Gordon Growth ...

    The Gordon growth model, also known as the dividend discount model (DDM), is used to calculate the intrinsic value of a company ... Read Full Answer >>
  4. How can I calculate the value of a stock as per the Gordon Grown Model, using Excel?

    The Gordon growth model, or the dividend discount model, is a model used to calculate the intrinsic value of a stock based ... Read Full Answer >>
  5. What are the advantages and disadvantages of the Gordon Growth Model?

    The Gordon Growth Model, also known as the dividend discount model, measures the value of a publicly traded stock by summing ... Read Full Answer >>
  6. Why is the Gordon Growth Model not more widely used?

    The Gordon growth model is not more widely used because it relies on many assumptions that are hard to predict. The Gordon ... Read Full Answer >>
  7. How does the required rate of return affect the price of a stock, in terms of the ...

    First, a quick review: the required rate of return is defined as the return, expressed as a percentage, that an investor ... Read Full Answer >>

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