What Does Gordon Growth Model Mean?
A model for determining the intrinsic value of a stock on the basis of 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. It is calculated as follows:
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).
Investopedia explains Gordon Growth Model
Because the model simplistically assumes a constant rate of growth, it generally is used only for mature companies (or broad market indices) with low to moderate growth rates.
Related Terms:
• Discount Rate
• Dividend Discount Model—DDM
• Intrinsic Value
• Present Value—PV
• Required Rate of Return
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