CandleFocus Glossary Editor
The Gordon Growth Model (GGM) is an important formula for valuing company stocks, and it is based on the dividend discount model (DDM). Through the uses of the GGM, investors can determine an intrinsic value for a company's stock, which can be useful when planning an investment and evaluating the potential of a given stock.
The 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.
The 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.