Definition
The Gordon Growth Model (GGM) simplifies the DDM by assuming dividends grow at a constant rate forever. It is elegant but restrictive—the growth rate must be less than the discount rate, and it only works for companies with stable, predictable dividend policies. Despite its simplicity, GGM provides a useful baseline valuation for mature companies.
functions Formula
P = D₁ / (r − g)
lightbulb Example
Current dividend $2.50, expected growth 3%, cost of equity 9%. D₁ = $2.50 × 1.03 = $2.575. P = $2.575 / (0.09 - 0.03) = $42.92.
verified_user Key Points
- Simplest intrinsic valuation model
- Growth rate must be below discount rate
- Works best for stable, mature companies
- Foundation for more complex multi-stage models