Gordon growth model
Gordon growth model A model used to value businesses or shares based on applying a present-value formula to future dividends. It assumes that the value of shares is the present value of future dividends, which will grow at a fixed rate g, and is expressed in the formula:
where Pt is the value of a share or business in time period t; Di + 1 is the value of the dividend in time period t plus one time period; r is the appropriate present value discount rate; and g is the growth rate of dividends per time period. The formula will only work if r is greater than g, which will be the case for mature companies.
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