The Gordon Growth Model

The Gordon Growth Model is the simplest practical implementation of discounted dividend valuation.

• Used to determine a fair share price for a stock.
• Works best for mature, stable companies with steady dividend and earnings growth.
• Assumes constant earnings growth and dividend payout ratio.
• Very sensitive to discount rate and growth rate assumptions.

Stock Price = D (1+g) / (r-g)

where,

D = the annual dividend g = the projected dividend growth rate, and r = the investor's required rate of return.

gordonGrowthModel <- function (dividend,growthrate,discountrate)
{
   dividend * (1+growthrate)/(discountrate-growthrate)

}

Example

Assuming dividend of $2.50, a dividend growth rate of 4%, and a discount rate of 7%.

gordonGrowthModel(2.50,.04,.07)

[1] 86.66667

A fair value of stock price would be $86.67.

This slide deck was created for the Developing Data Products class available at Coursera. To view the associated Shiny demo application, please visit:

http://slingshot.shinyapps.io/dataproducts-project1/

For a more thorough discussion, see website at:

http://www.investinganswers.com/education/stock-valuation/how-use-gordon-growth-model-2456

Source code available at https://github.com/sometxdude/dataproject1