Constant Growth (Gordon) Model
Gordon Model is used to determine the current price of a security. The Gordon model assumes that the current price of a security will be affected by the dividends, the growth rate of the dividends, and the required rate of return by shareholders. Use the Gordon Model Calculator below to solve the formula.
Constant Growth (Gordon) Model Definition
Constant Growth Model is used to determine the current price of a share relative to its dividend payments, the expected growth rate of these dividends, and the required rate of return by investors in the market
Variables
Current Annual Dividends=Annual dividends paid to investors in the last year
K=Required rate of return by investors in the market
G=Expected constant growth rate of the annual dividend payments
Current Price=Current price of stock
K=Required rate of return by investors in the market
G=Expected constant growth rate of the annual dividend payments
Current Price=Current price of stock
Constant Growth (Gordon) Model Formula
Gordon Model
The Gordon Model, also known as the Constant Growth Rate Model, is a valuation technique designed to determine the value of a share based on the dividends paid to shareholders, and the growth rate of those dividends.
Dividends
Dividends are the most crucial to the development and implementation of the Gordon Model. Investors buy shares in a company, and have two possible ways of receiving a financial benefit, they either receive dividends from the company, or they sell their shares and receive a capital gain if the price received is higher than the price paid.
Assuming that a share will continue to exist in perpetuity, and that the company intends to pay dividends for as long as its shares are outstanding, we can logically develop a valuation technique based solely on the dividends paid.