Gordon Growth Model (redirected from Gordon model)

Gordon Growth Model

A simple model to estimate the value of a stock. The model assumes one knows the dividend per share in the stock one year hence and, more importantly, that the dividends will grow at a constant rate indefinitely. Because of the latter assumption, the model is useful primarily for blue chip companies and other mature companies where dividend growth is unlikely to change. It is calculated thusly:

Stock Value = Dividend per share in one year / (Required rate of return - dividend growth rate)

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Gordon Growth Model

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