Dividend Growth Model Calculator

Gordon Growth Model:

\[ P = \frac{D}{r - g} \]

Expected Dividend Per Share (D):

currency

Required Rate of Return (r):

decimal

Dividend Growth Rate (g):

decimal

Current Stock Price (P):

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1. What is the Gordon Growth Model?

The Gordon Growth Model, also known as the Dividend Discount Model, is a method used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It is widely used for companies with stable dividend growth.

2. How Does the Calculator Work?

The calculator uses the Gordon Growth Model equation:

\[ P = \frac{D}{r - g} \]

Where:

\( P \) — Current stock price (currency)
\( D \) — Expected dividend per share (currency)
\( r \) — Required rate of return (decimal)
\( g \) — Dividend growth rate (decimal)

Explanation: The model assumes that dividends will continue to grow at a constant rate indefinitely, and discounts them back to present value.

3. Importance of Stock Price Calculation

Details: Accurate stock valuation is crucial for investment decisions, portfolio management, and financial planning. The Gordon Growth Model provides a fundamental approach to valuing dividend-paying stocks.

4. Using the Calculator

Tips: Enter expected dividend per share in currency, required rate of return as a decimal (e.g., 0.08 for 8%), and dividend growth rate as a decimal. Ensure that the required rate of return is greater than the growth rate.

5. Frequently Asked Questions (FAQ)

Q1: What are the limitations of the Gordon Growth Model?
A: The model assumes a constant growth rate forever, which may not be realistic for all companies. It is most suitable for mature, stable companies with predictable dividend growth.

Q2: How do I determine the required rate of return?
A: The required rate of return can be estimated using models like CAPM (Capital Asset Pricing Model), which considers the risk-free rate, market risk premium, and the stock's beta.

Q3: What if the growth rate is higher than the required return?
A: The model breaks down if g ≥ r, as it would result in an infinite or negative stock price. This scenario is not sustainable in the long term.

Q4: Can the model be used for non-dividend paying stocks?
A: No, the Gordon Growth Model specifically requires dividend payments. Alternative valuation methods like discounted cash flow (DCF) should be used for non-dividend stocks.

Q5: How sensitive is the model to changes in inputs?
A: The model is highly sensitive to changes in the growth rate and required return. Small changes in these inputs can significantly affect the calculated stock price.