What Is Gordon Growth Model (GGM)?

Finance
#1

The Gordon Growth Model (GGM) is used to calculate a stock’s intrinsic value based on a sequence of dividends that rise at a consistent pace in the future. It’s a common and easy dividend discount model variation (DDM). The GGM solves for the present value of an endless sequence of future payouts, assuming that dividends grow at a constant rate in perpetuity. Because the model implies a steady growth rate, it is often only used for firms with consistent dividend per share growth rates.

#2

  • Gordon Growth Model (GGM) assumes that a company exists forever and that there is a constant growth in dividends when valuing a company’s stock.

  • GGM takes the infinite series of dividends per share and discounts them back into the present using the required rate of return.

  • GGM is a variant of the dividend discount model (DDM).

  • GGM is ideal for companies with steady growth rates given its assumption of constant dividend growth.