1. What is the Dividend Growth Model?

The Gordon Growth Model (also known as the Dividend Discount Model) is a method to value a company's stock price based on the theory that its stock is worth the sum of all its future dividend payments, discounted back to their present value.

2. How Does the Calculator Work?

The calculator uses the Gordon Growth Model equation:

Where:

• \( D1 \) — Expected dividend in next period (USD)
• \( k \) — Required rate of return (decimal)
• \( g \) — Constant growth rate of dividends (decimal)

Explanation: The model assumes dividends will continue to grow at a constant rate indefinitely, and that the growth rate is less than the required return.

3. Importance of Stock Valuation

Details: Accurate stock valuation is crucial for investors to determine whether a stock is overvalued or undervalued compared to its market price, helping in investment decision making.

4. Using the Calculator

Tips: Enter the expected next dividend in USD, required return as a decimal (e.g., 0.08 for 8%), and growth rate as a decimal. The growth rate must be less than the required return.

5. Frequently Asked Questions (FAQ)

Q1: When is this model most appropriate?
A: The model works best for stable, mature companies that pay regular dividends and have predictable growth rates.

Q2: What if the growth rate exceeds required return?
A: The model breaks down mathematically and cannot be used when g ≥ k, as it would imply infinite value.

Q3: How do I estimate the required return (k)?
A: It's often estimated using the Capital Asset Pricing Model (CAPM) or based on the investor's required rate of return.

Q4: What are limitations of this model?
A: It assumes constant growth forever, doesn't account for changing market conditions, and is sensitive to input estimates.

Q5: Can this model value non-dividend paying stocks?
A: No, alternative valuation methods like discounted cash flow are needed for non-dividend paying companies.