Gordon Growth Model formula explained. Dividend discount model for stock valuation — single-stage and multi-stage DDM with worked examples.
True worth based on fundamentals. Compare to market price: undervalued if V > P.
V = Σ D<sub>t</sub>/(1+r)<sup>t</sup>. Value of stock = PV of all expected future dividends.
V = D<sub>1</sub>/(r - g). Assumes constant growth forever. Only works if r > g.
P/E, P/B, P/S, P/CF. Quick relative valuation. Compare to peers and history.
From Gordon model: Justified P/E = (1-b)/(r-g) where b = retention ratio, g = b × ROE.
EV/EBITDA: useful for comparing firms with different capital structures. EV = Market Cap + Debt - Cash.
Gordon Growth Model
Where: D<sub>1</sub> = next year dividend, r = required return, g = constant growth
Multi-Stage DDM
Where: V<sub>n</sub> = terminal value using Gordon model
Sustainable Growth Rate
Where: b = retention ratio = 1 - payout ratio
Trailing P/E
Where: Based on past earnings
Forward P/E
Where: Based on forecasted earnings
Enterprise Value
Where: Value of entire firm (equity + debt)
DDM (Gordon Growth)
Constant growth dividend model
Required Return (DDM)
Dividend yield + growth rate
Price-to-Earnings
Leading P/E uses forecasted EPS
Justified P/E (Leading)
b = retention ratio, g = b × ROE
Sustainable Growth
b = retention ratio = 1 - payout
PEG Ratio
P/E relative to growth rate
Price-to-Book
P/B < 1 may signal undervaluation
Enterprise Value
Total value of the firm
EV/EBITDA
Cross-capital structure comparison
Use when:
Avoid when:
D<sub>1</sub> = $3.00, r = 12%, g = 4%. Stock value per Gordon Growth Model:
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