Gordon model

The Gordon Model, also called the Gordon Growth Model or the Dividend Discount Model, is a method for valuing a stock. It is named after Myron Gordon, who is currently a professor at the University of Toronto.

It assumes that the company issues a dividend that has a current value of D that grows at rate g. It also assumes that the risk-free interest rate remains constant at r. It involves summing the infinite series

$\sum _{t=1}^{\infty }D*{\frac {(1+g)^{t}}{(1+r)^{t}}}$.

The current price of the above security should be

$P=D*{\frac {1+g}{r-g}}$.

The model requires that g>r or else the value of the stock is negative. It also requires that the current level of the dividend be a positive number. Because of this, it cannot be used to calculate the value of stocks that do not pay dividends, such as many growth stocks

References

• Myron J. Gordon (1962). The Investment, Financing, and Valuation of the Corporation. Homewood, Ill.: R.D. Irwin.
• The Homepage of Myron J. Gordon