# Gordon (Constant) Growth Dividend Discount Model

The Gordon Growth Model (GGM) is a variation of the standard discount model. The key difference is that the GGM model assumes the dividends will grow at a constant rate till perpetuity.

If the current year’s dividends are D0, and the dividend growth rate is gc, the next year’s dividend D1 will be D0 = (1+gc). D2 will be D0(1+gc)^2 and so on.

With this assumption, the value of the stock can be calculated using the following simplified formula:

V0 = D1/(ke - gc)

Model Assumptions

The model has several assumptions:

• It assumes that the dividends are a suitable measure for valuation.
• It assumes that both the required return on equity and dividend growth rate will be constant forever.
• The required return on common equity must be greater than the expected growth rate of the dividend.

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