Gordon Growth Formula: What Is the Gordon Growth Model?

Answer

The Gordon growth model is a constant-growth dividend discount model. It estimates a share’s value today by discounting an indefinitely continuing stream of dividends that grows at one constant rate.

$$P_0=\frac{D_1}{r-g},\qquad r>g.$$

• $P_0$: estimated value per share today.
• $D_1$: expected dividend per share one period from today.
• $r$: required return on equity per period.
• $g$: assumed dividend growth rate per period, continuing indefinitely.

If the dividend just paid is $D_0$, first compute $D_1=D_0(1+g)$, giving

$$P_0=\frac{D_0(1+g)}{r-g}.$$

Use consistent periods and express percentages as decimals. For annual dividends, both rates must be annual.

When the formula applies

The model is most suitable for a business whose dividend policy and long-run growth can reasonably be treated as stable. The required return must exceed the perpetual growth rate; otherwise the positive-dividend present-value series does not converge to this finite value. A negative denominator is not a meaningful negative stock valuation.

The result is an estimate conditional on expected dividends and chosen rates. It is not a guaranteed market price. Firms with a temporary high-growth phase generally need a model that treats that phase separately before applying a stable-growth terminal value.