Gordon Growth Model

Gordon Growth Model

A simple model to estimate the value of a stock. The model assumes one knows the dividend per share in the stock one year hence and, more importantly, that the dividends will grow at a constant rate indefinitely. Because of the latter assumption, the model is useful primarily for blue chip companies and other mature companies where dividend growth is unlikely to change. It is calculated thusly:

Stock Value = Dividend per share in one year / (Required rate of return - dividend growth rate)