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

Gordon Growth Model Calculator

Fair Value per share based on the Gordon Growth Model: $0.00

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.

How to Use the Gordon Growth Model to Calculate Terminal Value

The Gordon Growth Model (GGM) can be effectively used to calculate the terminal value in a Discounted Cash Flow (DCF) analysis.

The terminal value represents the value of a company’s cash flows beyond the forecast period, typically assuming that the business will grow at a steady rate indefinitely.

To calculate the terminal value using the Gordon Growth Model, you apply the following formula:

\( \text{Terminal Value} = \frac{\text{Final Year Cash Flow} \times (1 + \text{Perpetual Growth Rate})}{\text{Discount Rate} – \text{Perpetual Growth Rate}} \)

Where:

  • Final Year Cash Flow is the projected cash flow in the last forecasted year.
  • Perpetual Growth Rate is the constant growth rate assumed for the company beyond the forecast period.
  • Discount Rate is the required rate of return (often the company’s weighted average cost of capital or WACC).

By using this formula, the Gordon Growth Model allows investors and analysts to estimate the terminal value of a company in a DCF analysis, providing a way to account for cash flows far into the future, beyond the detailed forecasting period.

This terminal value is then discounted back to the present and added to the total value of the company.


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