Gordon Growth Model Calculator
Estimates the intrinsic value of a stock using the Gordon Growth Model based on expected dividends and growth rate.
Estimates the intrinsic value of a stock using the Gordon Growth Model based on expected dividends and growth rate. Enter your Expected Dividend Next Year (D1), Required Rate of Return (r), Dividend Growth Rate (g) to get an instant intrinsic stock value. Formula: d1 / (r - g).
Intrinsic Stock Value
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How It Works
How It Works
The Gordon Growth Model estimates the intrinsic value of a stock based on the dividends it is expected to pay in the future. It assumes that dividends will grow at a constant rate forever.
The calculator uses a simple formula: divide the expected dividend next year (D1) by the difference between the required rate of return (r) and the dividend growth rate (g). This gives a single number that represents the stock’s estimated value today.
- Uses next year’s expected dividend (D1)
- Subtracts growth rate (g) from required return (r)
- Divides D1 by (r − g)
- Assumes dividends grow at a constant rate forever
Understanding the Results
The result shows the estimated intrinsic value of the stock in the same currency as the dividend input. It represents what the stock may be worth today based on future dividend payments.
If the calculated value is higher than the current market price, the stock may appear undervalued. If it is lower than the market price, the stock may appear overvalued.
- Output is shown in the same currency as the dividend
- Higher growth increases the estimated value
- Higher required return lowers the estimated value
- Best used for companies with stable, steady dividend growth
Frequently Asked Questions
What is the Gordon Growth Model Calculator used for?
The Gordon Growth Model Calculator estimates the intrinsic value of a dividend-paying stock based on expected future dividends that grow at a constant rate. It is commonly used by long-term investors to determine whether a stock is overvalued or undervalued. The result represents the theoretical fair value of the stock today.
When should I use this calculator?
You should use this calculator when analyzing companies that pay stable and predictable dividends with a consistent growth rate. It works best for mature, established firms rather than high-growth or non-dividend-paying companies. The model assumes dividends will grow at a constant rate indefinitely.
What happens if the growth rate (g) is higher than the required return (r)?
If the dividend growth rate is equal to or higher than the required rate of return, the formula will not produce a meaningful result because the denominator (r - g) becomes zero or negative. This violates the assumptions of the model. In practice, the required return must always be greater than the growth rate.
How do I determine the required rate of return (r)?
The required rate of return reflects the return you expect to earn based on the stock’s risk. Investors often estimate it using models like the Capital Asset Pricing Model (CAPM) or by considering market returns and risk premiums. For example, if you require a 10% annual return, you would enter 0.10.
What should I enter for the expected dividend next year (D1)?
Enter the total dividend per share you expect the company to pay over the next year. For example, if you expect the company to pay $2.00 per share in dividends next year, enter 2.00. Make sure the dividend matches the same currency you want the intrinsic value calculated in.
Can this calculator be used for non-dividend-paying stocks?
No, the Gordon Growth Model is specifically designed for companies that pay regular dividends. Since the formula relies entirely on future dividend payments, it cannot be used for firms that do not distribute dividends. For such companies, alternative valuation methods like discounted cash flow (DCF) analysis are more appropriate.
Disclaimer
This financial calculator provides estimates only. Actual results may vary. Consult a qualified financial advisor for personalized guidance. Disclaimer.