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. Most valuation models forecast growth for a certain time period before reverting to a Gordon growth model to estimate the ending value.

The Gordon growth model formula is V(0) = [D(0)(1+g)]/(r-g)

where V(0) is the value today, D(0) is the current annual dividend, g is the annual growth rate and r is the required return on the stock. This can also be expressed as V(0) = D(1)/(r-g) where D(1) is next year’s dividend. If the dividend grows in line with the expected growth rate the two formulae are equivalent.

For more information, see all articles on: Valuation

See also:

Multi-Stage Dividend Discount Models

Strengths and Weaknesses of the Gordon Growth Model

The H-Model Dividend Discount Model

Valuing a Non-Dividend Paying Stock Using the Dividend Discount Model

The Gordon Growth Model Estimate of Equity Risk Premium