About

The Gordon Growth Model (GGM) is a method for determining the intrinsic value of a stock, exclusive of current market conditions, assuming that dividends grow at a constant rate in perpetuity. It is widely used by value investors to identify undervalued securities in stable sectors like utilities or real estate investment trusts (REITs).

This tool addresses the model's primary limitation: extreme sensitivity to input variables. A slight adjustment in the Required Rate of Return or the Growth Rate can drastically swing the valuation. To mitigate "model risk," this calculator generates a Sensitivity Matrix, allowing analysts to visualize a range of fair values based on probability bands of k and g.

Formulas

The model discounts the infinite series of future dividends back to the present value.

P = D₁k − g

Where P is the price, D₁ is the expected dividend next year, k is the required rate of return, and g is the growth rate.

Reference Data

Variable	Symbol	Description	Typical Range
Dividend per Share	D₁	Expected annual dividend for the next year.	$0.50 − $10.00
Cost of Equity	k	Minimum rate of return required by investors.	7% − 15%
Growth Rate	g	Constant annual growth rate of dividends.	2% − 5%
Constraint	k > g	Cost of Equity must exceed Growth Rate.	CRITICAL

Frequently Asked Questions

If the Growth Rate (g) is equal to or greater than the Required Rate of Return (k), the denominator becomes zero or negative, implying an infinite or negative stock price. Mathematically, the geometric series does not converge.

The formula requires D1 (Next Year's Dividend). If you have D0 (Current Dividend), calculate D1 using: D1 = D0 * (1 + g).

Generally, no. High-growth tech companies often pay no dividends or have erratic growth rates (g) that exceed the cost of equity (k) temporarily. GGM assumes a stable, constant growth phase indefinitely.