Gordon Growth Model
Candlefocus EditorThe GGM assumes that a company exists forever and that the dividend payments it makes will grow at a consistent rate, referred to as the required rate of return. This required rate of return can either be provided to the model as a known figure or be calculated using historical return rates. To arrive at the intrinsic value of a company's stock, the GGM takes the future series of dividend payments and discounts them to the present using the required rate of return.
Although the GGM is a powerful formula, it is best used for companies that have relatively predictable growth rates. If a company's dividends experience significant variations, the Gordon Growth Model might not provide accurate results. However, its results may be helpful for investors to calculate their expected return from a stock and make purchasing decisions accordingly. By finding the intrinsic value of a company's stock, the GGM can help investors see if the stock is worth buying, selling, or holding.
All in all, the Gordon Growth Model is an important formula for valuing a company's stock and can be useful for investors when considering whether a stock should be bought, sold, or held. It is important to remember that this formula is based on the assumption that dividend payments will grow at a consistent rate, and it works best for companies with relatively predictable growth rates.