The Gordon Growth Model Calculator is designed to help investors quickly ascertain the intrinsic value of stocks that pay dividends. By inputting expected dividends, the required rate of return, and the dividend growth rate, users can evaluate potential investment returns accurately.
Formula of Gordon Growth Model Calculator
At the heart of the Gordon Growth Model is the formula:

his equation calculates the intrinsic value (P) of a stock by dividing the expected annual dividend per share (D) by the difference between the required rate of return (r) and the dividend growth rate (g). Here’s a closer look at the components:
- P: The theoretical fair value of the stock, assuming a perpetual dividend growth.
- D: The per-share dividend expected next year.
- r: The investor’s desired return on investment.
- g: The annual growth rate of dividends, assumed to be constant.
Table of General Terms and Calculator Tools
To assist users further, here’s a glossary of terms frequently encountered when using the GGM:
Term | Definition | Example Values |
---|---|---|
P (Intrinsic Value) | The calculated real value of a stock based on expected future dividends, discounted to their present value. | Calculated Output |
D (Dividend) | The per-share dividend expected to be paid in the next period. | $1.00, $2.00, $3.00 |
r (Discount Rate) | The required rate of return, reflecting the risk of the investment. | 5% (0.05), 7% (0.07), 10% (0.10) |
g (Growth Rate) | The annual expected growth rate of the dividends. | 2% (0.02), 3% (0.03), 5% (0.05) |
Examples of Gordon Growth Model Calculator
Imagine you’re considering an investment in a company expected to pay a dividend of $2.00 per share next year, with a required return of 8% and an expected dividend growth rate of 3%. Using the GGM calculator: P = 2.00 / (0.08 – 0.03) = $40.00 This result tells you that based on your inputs, the stock is worth $40.00 per share under these assumptions.
Most Common FAQs
- How accurate is the Gordon Growth Model for stock valuation?
- The GGM provides a good estimate for stable companies with predictable dividend growth, but it may be less accurate for high-growth or non-dividend-paying companies.
- Can I use the GGM for stocks that don’t pay dividends?
- No, the GGM requires dividend data to calculate a stock’s value. For non-dividend stocks, other valuation models may be more appropriate.
- How do I determine the appropriate discount rate and growth rate for my calculations?
- The discount rate should reflect the riskiness of the investment, often estimated by looking at similar companies’ rates. The growth rate can