Gordon Growth Model

GORDON GROWTH MODEL

This model is designed to value the equity in a stable firm paying

dividends, which are roughly equal to Free Cashflows to
Equity.

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.

User defined inputs

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.

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Please enter inputs to the model:

Current Earnings per share = $4.33 (in currency)
Current Payout Ratio = 63.00% (in percent)

Are you directly entering the cost of equity? (Yes or No) No

If yes, enter cost of equity = (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 0.95
Riskfree rate = 7.00% (in percent)
Risk Premium= 5.50% (in percent)

Expected Growth Rate = 6% (in percent) The expected growth rate for a stable firm
cannot be significantly higher than the nominal
growth rate in the economy in which the firm
operates. It can be lower.

Warnings:

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This is the output from the Gordon Growth Model

Firm Details: from inputs on prior page

Current Dividends per share = $2.73

Cost of Equity = 12.23%

Expected Growth rate = 6.00%

Gordon Growth Model Value = 46.45

Growth rate Value

Value vs. Expected Growth
8.00% $69.73 $80.00
7.00% $55.86
$70.00
6.00% $46.45
5.00% $39.64 $60.00

Value of Stock
4.00% $34.49 $50.00
3.00% $30.46 $40.00
2.00% $27.21
1.00% $24.55 $30.00
0.00% $22.31 $20.00
$10.00
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Expected Growth Rate

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