What is Gordon Constant Growth Model (DDM) Calculator and How Do You Calculate It?
Intrinsic Stock Price = (D0 * (1 + g)) / (r - g)This standardized equation forms the quantitative foundation used by chartered financial analysts (CFA), investment bankers, and corporate treasurers under GAAP and IFRS reporting frameworks.
Formula Components & Operational Definitions
D0Annual dividend paid per share over past 12 months.
gExpected perpetual annual growth rate in dividends.
rInvestor required return or discount rate.
Step-by-Step Real-World 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.
Strategic Takeaway: The Gordon model works best for mature, cash-generative companies with steady dividend policies.
Industry Benchmark Comparison Table
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.
Executive Sector Note: Most effective for mature utilities, consumer staples, and stable dividend payers.
Analytical Comparison & Critical 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.