Gordon growth model (Dividend discount model)

Last updated: 16.03.2016

Gordon growth model (Dividend discount model) uses the assumed relationship of the constantly growing dividend amount received in perpetuity and the share price and is used to (39):

 

  • calculate market value of share (equity) = present value of future dividends

P0 = D1 / (Ke – g)

 

Ke = (D1/P0) + g

 

where:

Ke = cost of equity

D1 = expected annual dividend per share in year 1 (D1 = D0 * (1 + g))

P0 = ex-dividend share price = market value

g = constant annual growth rate (39)

 

Example:

The last dividend per share was € 0,15; current share price is € 0,89; annual growth rate is 3%.

D1 = 0,15 * (1 + 0,03) = 0,1545

Ke = (0,1545 / 0,89) + 0,03 = 0,204 (= 20,4%)

 

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Used sources:

39. Dividend growth model (online). Citation date: 30.1.2016. Available from www:  https://wiki.treasurers.org/wiki/Dividend_growth_model



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