Gordon Growth Model

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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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However, a number of asset-pricing models deviate from the standard Gordon model.
For example, if the next period cash flow is expected to be $1, the discount rate is 10 percent and the growth rate of cash flows 5 percent, then the Gordon Model would indicate a price of $20 (P=$1/(0.
Note that this equation is essentially the same as the original Gordon model, except that instead of using long-term interest rates and growth rates, we used the present value of one-period interest rates and one-period growth rates of future dividends.
The model assumes that the net present value of future dividends per share (dps) determine the price, but it does not impose restrictions on how the expected dps sequence should evolve (as for example the Gordon model, which assumes constant dividend growth and a homogenous relation between dps and eps).
Variations of the Gordon model are evident in other instances when ambitious leaders have sought to advance regionally significant objectives.
sh]) will be less than the freely traded value indicated by the Gordon Model.
The Gordon model price for, say, 1980 was calculated by estimating g as the average annual growth rate in dividends and r as the average annual return to holding the S&P 500 index for the 1871-1979 period and using dividends paid during 1979.
The most natural application of the Gordon model is to interpret time variation in dividend-price ratios.
The intuition of the Barro and Gordon model does not apply here; the policymakers are not trying to fool their private sector associates.
NUMBER ONE: Craig Gordon models Under Armour's keeper's kit; ADMIRER: Arsenal's Arsene Wenger; FLASH GORDON: In action for Scotland
They come together again, first by coincidence, then by fiat of a reality television producer in Los Angeles who just happens to live in a house commissioned from Packer Gordon, collect Packer Gordon models and drawings, and bear a grudge: Gordon broke up his marriage.
KIT MEN: Craig Gordon models Scotland's new kit with Kris Boyd, left, and Gary Caldwell' PICTURE:ROBCASEY