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Gordon Growth Model:
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The Gordon Growth Model (also known as the Dividend Discount Model) is a method used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It assumes that dividends will continue to grow at a steady rate indefinitely.
The calculator uses the Gordon Growth Model formula:
Where:
Explanation: The model calculates the present value of an infinite stream of future dividends that are growing at a constant rate.
Details: Accurate stock valuation is crucial for investment decisions, portfolio management, and determining whether a stock is overvalued or undervalued in the market.
Tips: Enter the current dividend in currency units, growth rate as a percentage, and required rate of return as a percentage. The required rate must be greater than the growth rate for the model to be valid.
Q1: What are the main assumptions of the Gordon Growth Model?
A: The model assumes constant dividend growth rate, constant required rate of return, and that the growth rate is less than the required rate of return.
Q2: When is this model most appropriate to use?
A: This model works best for mature, stable companies with predictable dividend growth patterns and established dividend payment histories.
Q3: What are the limitations of this model?
A: The model doesn't work well for companies that don't pay dividends, have unstable growth rates, or for growth companies where r ≤ g.
Q4: How do I determine the required rate of return?
A: The required rate is typically based on the risk-free rate plus a risk premium that reflects the stock's volatility and market risk.
Q5: Can this model be used for non-dividend paying stocks?
A: No, this model specifically requires dividend payments. Alternative valuation methods like discounted cash flow are needed for non-dividend stocks.