1. What is the Gordon Growth Model?

The Gordon Growth Model (also known as the Dividend Discount Model) is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It can also be rearranged to calculate the expected return on a stock.

2. How Does the Calculator Work?

The calculator uses the Gordon Growth Model equation:

Where:

• \( Dividend\_yield \) — Current dividend yield (dividend/price) as a percentage
• \( Growth\_rate \) — Expected constant growth rate of dividends as a percentage

Explanation: The model assumes dividends will continue to grow at a constant rate indefinitely, and the expected return is the sum of the dividend yield and growth rate.

3. Importance of Expected Return Calculation

Details: Calculating expected return helps investors evaluate whether a stock meets their required rate of return and compare different investment opportunities.

4. Using the Calculator

Tips: Enter the current dividend yield and expected growth rate as percentages. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What are typical dividend yields?
A: Dividend yields vary by sector but typically range from 0% (growth stocks) to 3-5% (mature companies), with some reaching 6-10% in high-yield situations.

Q2: How do I estimate the growth rate?
A: Look at historical dividend growth, analyst estimates, or use the company's sustainable growth rate (ROE × retention ratio).

Q3: What are limitations of this model?
A: It assumes constant growth forever, which may not be realistic. It works best for stable, dividend-paying companies.

Q4: Can I use this for non-dividend stocks?
A: No, this model requires dividends. For non-dividend stocks, other models like CAPM may be more appropriate.

Q5: How does this compare to CAPM?
A: CAPM considers market risk (beta) while this model focuses on dividends. They provide different perspectives on expected return.