Gordon model
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The Gordon model, also called Gordon's model or the Gordon growth model is a variant of the discounted dividend model, 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 a constant rate g. It also assumes that the required rate of return for the stock remains constant at k which is equal to the cost of equity for that company. It involves summing the infinite series.
[\sum_^ D*\frac].
The current price of the above security should be
[P = D*\frac].
The model requires a constant growth rate and that g<k. If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock. One common technique is to assume that the Miller-Mogdiliani hypothesis of dividend irrelevance is true, and therefore replace the stocks's dividendD with E earnings per share.
See also
- Dividend discount model
- Stock valuation
References
- Myron J. Gordon (1962). The Investment, Financing, and Valuation of the Corporation. Homewood, Ill.: R.D. Irwin.
- [The Homepage of Myron J. Gordon]
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