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Gordon Growth Model:
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The Gordon Growth Model (GGM), also known as the dividend discount model (DDM), is a method for valuing a stock by assuming constant growth in dividends. It's widely used to determine the intrinsic value of stocks that pay dividends.
The calculator uses the Gordon Growth Model equation:
Where:
Explanation: The model assumes that dividends will continue to grow at a constant rate indefinitely and that the growth rate is less than the required rate of return.
Details: Accurate stock valuation is crucial for investors to make informed decisions about buying, holding, or selling stocks. The GGM is particularly useful for valuing mature companies with stable dividend growth.
Tips: Enter the expected dividend in USD, required rate of return as a decimal (e.g., 0.08 for 8%), and growth rate as a decimal. The growth rate must be less than the required rate of return.
Q1: What are the limitations of the Gordon Growth Model?
A: The model assumes constant dividend growth forever, which may not be realistic. It's most appropriate for stable, mature companies with predictable dividend growth.
Q2: How do I estimate the required rate of return?
A: The required rate of return can be estimated using the Capital Asset Pricing Model (CAPM) or based on your personal investment requirements.
Q3: What if the growth rate equals the required return?
A: The model breaks down when g ≥ r, as the denominator becomes zero or negative, leading to infinite or negative stock values.
Q4: Can this model be used for non-dividend paying stocks?
A: No, the GGM is specifically for dividend-paying stocks. Other valuation methods like discounted cash flow are needed for non-dividend stocks.
Q5: How sensitive is the model to changes in inputs?
A: The model is highly sensitive to changes in the growth rate and required return, especially when r and g are close in value.