How this number is made
The Gordon model says a stock that pays a dividend growing forever at one rate is worth next year’s dividend divided by the gap between the required return and that growth. If growth is not below the required return, the model has no finite price. A dividend that will not grow forever at one rate does not fit the model, even if the arithmetic still runs.
- Next year’s dividend is last year’s dividend grown once, if you are starting from a dividend already paid.
- The required return has to be higher than the growth rate.
Formula
Price = next dividend ÷ (required return − growth).
Worked example
With the figures already in the form, model price is $40.00.
Questions
What if the company pays no dividend?
The model price is zero. That is a limit of the model, not a statement that the shares are worthless.
Can growth be negative?
Yes. A shrinking dividend still has a price if you believe the shrink continues forever.