Assuming the company does well in the next year and grows at a growth rate of more than 10%, let us say 12%, the price of the stock will be:.Variations in the Price of the Stock Calculated Under Gordon’s Constant Growth Rate DCF Model According to the constant growth model, if the stock’s value is $110 for the next year, but if the stock is trading at $100, then it is undervalued. Hence the stock value grows by a constant rate of 1.1 over the next 4 years and will continue to grow by 10% for all the forthcoming years. Assuming a 15% required rate of return the value of the stock can be calculated as follows: The dividend has been growing at the rate of 10% annually.
Let us say a stock pays a dividend of $ 5 this year. Example for Calculating Value of Stock Using Gordon’s Growth Model Let us look at the example below to better understand the concept of the constant growth model. To put it in simple words, both the dividend amount and the stock price/value will increase at a constant growth rate. When k and g, i.e., investors required rate of return and expected growth rate, do not change over the years, so the stock’s fair/intrinsic value will increase annually by the rate of dividend increase. G = Expected growth rate (Note: It should be assumed to be constant)ĭ 1= Next year’s expected annual dividend per share K = Investors required rate of return, discount rate Where p = Intrinsic value of the stock/equity Variations in the Price of the Stock Calculated Under Gordon’s Constant Growth Rate DCF Modelįormula for Gordon Growth Model / Constant Growth Rate DCF Method.Example for Calculating Value of Stock Using Gordon’s Growth Model.Formula for Gordon Growth Model / Constant Growth Rate DCF Method.
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