Financial Education

The Gordon growth model is a type of dividend discount model used to value companies expected to grow at a constant rate forever. However, few stocks exhibit such characteristics. Most valuation models forecast growth for a certain time period before reverting to a Gordon growth model to estimate the ending value.

Practitioners often consider three phases of growth: high growth, transition and maturity. The final stage can be used to estimate the residual value at some future time – often many years away – using the Gordon growth model. The initial stages can be valued using more direct discounted cash flow estimates.

For more information, see all articles on: Investing in Stocks, Valuation

See also:

Using the Market Price to Calculate Implicit Return in a Multi-Stage Dividend Discount Model

Strengths and Weaknesses of Multi-Stage Dividend Discount Models

A Two Stage Dividend Discount Model With Constant First-Stage Growth

A Three Stage H-Model Dividend Discount Model

The Gordon Growth Model