Gordon Growth Model
  • Gordon Growth Model
Originally published: 22/06/2016 08:25
Publication number: ELQ-60016-1
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Gordon Growth Model

Value the equity in a stable firm paying dividends, with stable growth

dividendsfcfefinancefree cash flow to equitygordongrowthmodelstable growthvaluation

This model is designed to value the equity in a stable firm paying dividends, which are roughly equal to Free Cashflows to Equity.

The user has to define the following inputs to the model:
1. Current Earnings per share and Payout ratio (Dividends/Earnings)
2. Cost of Equity or Inputs to the CAPM (Beta, Riskfree rate, Risk Premium)
3. Expected Growth Rate in Earnings and dividends forever.

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School (www.damodaran.com)

This business tool includes
1 Excel Model File

Prof. Aswath Damodaran offers you this business tool for free!

download for free


Further information

This is the output from the Gordon Growth Model

- Current Dividends per share
- Cost of Equity
- Expected Growth rate

Best suited for firms growing at the same rate as the economy and paying residual cash as dividends.

Assumptions in the model:
1. The firm is in steady state and will grow at a stable rate forever.
2. The firm pays out what it can afford to in dividends, i.e., Dividends = FCFE.


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