A dividend discount model that values a stock as the next period's dividend divided by the difference between the discount rate and the perpetual dividend growth rate.
Deeper Explanation
The Gordon Growth Model formula: Intrinsic Value = D₁ ÷ (r − g), where D₁ is next year's dividend, r is the required return (cost of equity), and g is the perpetual growth rate. Its elegant simplicity is also its main limitation: it is only valid when g is less than r, and it is extraordinarily sensitive to the assumed growth rate. A business valued at ₹100 with a 3% growth assumption becomes worth ₹150 if growth is revised to 4% — a 50% change in value from a 1% change in assumption. Despite its limitations, the model is useful for valuing dividend-paying utilities and consumer staples with predictable, slow-growing cash flows, where growth rate assumptions are relatively stable.
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