The Gordon Growth Model Calculator helps estimate the fair value of a stock by assuming dividends grow at a constant rate forever. This model simplifies stock valuation by discounting future dividends to their present value.
It’s an effective tool for investors analyzing dividend-paying companies with steady growth.
Gordon Growth Model Calculator
Definition: What is the Gordon Growth Model?
The Gordon Growth Model (GGM) is a financial model used to determine the intrinsic value of a stock based on the assumption that dividends will grow at a constant rate indefinitely.
It is a simplified form of the Dividend Discount Model (DDM) and is primarily used for valuing stable, dividend-paying companies.
The formula calculates the present value of an infinite series of future dividends by discounting them at the required rate of return, making it particularly useful for long-term investors.
Gordon Growth Model: Formula & Calculation
The Gordon Growth Model (GGM) formula is used to calculate the intrinsic value of a stock based on its future dividends, assuming constant growth.
The formula is:
\( \text{Stock Price} = \frac{\text{Dividends per Share}}{\text{Discount Rate} – \text{Dividend Growth Rate}} \)Where:
- Dividends per Share is the annual dividend payout.
- Discount Rate is the required rate of return.
- Dividend Growth Rate is the expected annual growth rate of the dividends.
To calculate, subtract the growth rate from the discount rate and divide the annual dividend by the result. This gives the fair value of the stock based on projected future dividends.
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