Gordon Constant Growth Dividend Discount Model (DDM)
The Gordon Growth Model determines the theoretical fair market value of a stock based on a constant perpetual growth rate of its dividend payouts.
Sensitivity Analysis
Evaluate how variations in key operational drivers impact Gordon Growth Fair Value.
| Sensitivity Case | Assumption Shift | Driver Value | Gordon Growth Fair Value | Impact vs Base |
|---|
Formula & Methodology
Intrinsic Stock Price = (D0 * (1 + g)) / (r - g)D0Annual dividend paid per share over past 12 months.
gExpected perpetual annual growth rate in dividends.
rInvestor required return or discount rate.
Practical Worked Example
A blue-chip stock pays an annual dividend of Rs 25.00 with expected 6% perpetual growth and an 11% required cost of equity.
Interpretation & Industry Benchmarks
The Gordon Growth Model represents the classic dividend discount approach taught by the CFA Institute.
Stock trades at a discount to intrinsic dividend cash flows.
Industry Nuance: Most effective for mature utilities, consumer staples, and stable dividend payers.
Analytical Limitations
- Cannot be used for non-dividend paying stocks or hyper-growth companies where g > r.
Frequently Asked Questions
Why must required return be greater than growth rate (r > g)?
If perpetual dividend growth exceeded the discount rate, the stock would mathematically possess infinite value.