Gordon Growth Model

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 forever (in perpetuity), the model solves for the present value of the infinite series of future dividends.





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).

Notes:

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.

See also: Dividend Discount Model - DDM, Discount Rate, Dividend, Equity Risk Premium, Valuation