The Gordon Growth Model is a very important financial theory. This model deals with adding up of the infinite series.
Use of Gordon Growth Model
The Gordon growth model is employed in order to provide valuation issues for the following categories:
- Business Transactions, which are presently outside the regular market
- Tax Planning
The Gordon Growth Model is also used to ascertain a stock's intrinsic value. The calculations are normally done on the basis of a future series of dividends. The dividends are presumed to grow at a fixed rate.
The Gordon Growth Model is normally used in case of mature companies and indices of broad markets that have lower and moderate rates of growth.
Formula for Gordon Growth Model
The formula of the Gordon Growth Model is as follows:
Stock Value (P) = D / k - G
In this formula, "D" stands for expected dividend per share one year from the present time, "G" stands for rate of growth of dividends and "k" represents the required return rate for the equity investor.