Gordon Growth Model

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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

Where:
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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RELATED FAQS
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  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 >>
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    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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