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Constant Growth Stock Formula:
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The Constant Growth Stock Model, also known as the Gordon Growth 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 assumes dividends will continue to grow at a steady rate indefinitely.
The calculator uses the Constant Growth Stock formula:
Where:
Explanation: The model discounts the infinite series of future dividends to determine the present value of the stock.
Details: Accurate stock valuation is crucial for investors to make informed decisions about buying, holding, or selling stocks. The constant growth model is particularly useful for valuing mature companies with stable dividend growth.
Tips: Enter current dividend in USD, growth rate as a decimal (e.g., 0.05 for 5%), and required return as a decimal. The required return must be greater than the growth rate for the model to work.
Q1: What types of companies is this model best suited for?
A: The model works best for mature, stable companies with a history of consistent dividend growth, such as many blue-chip stocks.
Q2: What if the growth rate exceeds the required return?
A: The model breaks down when g ≥ r, as it would imply infinite stock value. This suggests the company is in a high-growth phase where this model isn't appropriate.
Q3: How do I estimate the required rate of return?
A: The required return can be estimated using models like CAPM (Capital Asset Pricing Model) or based on your personal investment return requirements.
Q4: What are limitations of this model?
A: It doesn't work for companies that don't pay dividends, assumes constant growth forever, and is sensitive to input estimates.
Q5: Can this model be used for non-dividend paying stocks?
A: No, alternative valuation methods like discounted cash flow or multiples analysis would be more appropriate for non-dividend paying stocks.