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Gordon Growth Model:
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The Gordon Growth Model (also known as the Dividend Discount Model) is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It calculates the expected return on a stock investment.
The calculator uses the Gordon Growth Model equation:
Where:
Explanation: The model assumes dividends will continue to grow at a constant rate indefinitely and calculates the total expected return as the sum of dividend yield and growth rate.
Details: Calculating expected return helps investors evaluate whether a stock is fairly valued, compare investment opportunities, and make informed decisions about portfolio allocation and risk management.
Tips: Enter the expected dividend per share for next year in dollars, the current stock price in dollars, and the expected constant growth rate of dividends as a percentage. All values must be valid positive numbers.
Q1: What assumptions does the Gordon Growth Model make?
A: The model assumes constant dividend growth rate, stable financial policies, and that the growth rate is less than the required rate of return.
Q2: How accurate is this model in real-world applications?
A: While useful for stable, dividend-paying companies, the model may be less accurate for growth companies that don't pay dividends or have inconsistent growth patterns.
Q3: What is a reasonable growth rate (g) to use?
A: Growth rates should be based on historical dividend growth, company guidance, and industry averages. Typically ranges from 2-6% for mature companies.
Q4: Can this model be used for non-dividend paying stocks?
A: No, the Gordon Growth Model requires dividend payments. Alternative valuation methods should be used for non-dividend paying stocks.
Q5: How does this compare to other valuation methods?
A: The Gordon Growth Model is simpler than DCF models but works best for stable, mature companies with predictable dividend growth patterns.