Table of Contents

What Are the Advantages and Disadvantages of the Gordon Growth Model?

By

澳洲幸运5开奖号码历史查询:Evan Tarver

Updated November 06, 2024

Reviewed by

Cierra Murry

Fact checked by

Yarilet Perez

The Gordon Growth Model is also known as the 澳洲幸运5开奖号码历史查询:dividend discount model. It measures the value of a publicly traded stock by summing the values of all its expected future dividend payments discounted back to their present values. It essentially values a stock based on the 澳洲幸运5开奖号码历史查询:net present value (NPV) of its expected future dividends.

There are two types of Gordon Growth Models: the stable growth model and the multistage growth model.

Key Takeaways

The Gordon Growth Model measures the value of a publicly traded stock.
It's the most commonly used method to calculate share prices.
The Gordon Growth Model doesn't measure non-dividend factors that can increase the value of a company.
It's based on the assumption that a company's 澳洲幸运5开奖号码历史查询:dividend growth rate is stable and known.

Gordon Growth Model Calculation

The Gor🉐don Growth Model calculation is relatively straightforward:

Gordon Growth Model: stock price = (dividend payment in the next period) / (cost of equity - 澳洲幸运5开奖号码历史查询:dividend growth rate).

Advantages of the Gordon Growth Model

The advantage of the Gordon Growth Model is that it's the most commonly used method to 澳洲幸运5开奖号码历史查询:calculate share price so it's the easiest to understand. It values a company's stock without taking into account marཧket conditions, making comparisons across companies of different sizes and in different industries more streamlined.

Disadvantages of the Gordon Growth Model

The Gordon Growth Model has several disadvantages. It doesn't take non-dividend factors such as 澳洲幸运5开奖号码历史查询:brand loyalty, customer retention, and the ownership of 澳洲幸运5开奖号码历史查询:intangible assets into account. All these factors can increase the value of a co🅠mp🌌any.

Important

The Gordon Growth Model also relies heavily on the assumption that a company's dividend growth rate is stable and known.

An even more general version of the Gordon Growth Model must be used if a stock such as a growth stock doesn't pay a current dividend. This places an even greꦐater reliance on assumptions.

The model also asserts that a company's stock price is hypersensitive to the dividend growth rate that's chosen and the growth rate can't exceed the 澳洲幸运5开奖号码历史查询:cost of equity. This may not always be the case.

What Is the Dividend Growth Rate?

The dividend growth rate measures the growth of a company's dividend across a predetermined period. It's typically calculated annually. It puts a spotlight on a company's long-term profitability.

What Are Intangible Assets?

Intangible assets are non-physical assets. They can't be touched but they nonetheless have value. They can be sold, leased, or transferred and they include copyrights, patents, and licenses.

What Is a Growth Stock?

A growth stock is a company that's expected to grow at a rate faster than the market average. Common measurements and factors considered include profits, cash flow, revenue, and share prices. These tend to be new, small companies that reinvest their earnings.

The Bottom Line

The Gordon Growth Model measures the value of a stock based on the net present value (NPV) of its anticipated future dividends. It's commonly used and it's easy to understand but it leaves out some important components such as intangible assets and brand loyalty.

Investing decisions shouldn't be based on one measurement alone but on a combination of factors. Always consult with a professional before you part with your money if you're new to investing or you have questions.

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NYU Stern School of Business. "." Page 11.

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