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Gordon Growth Model Excel Template: Visit: Email

1) The document describes using the Gordon Growth Model to value stock of company ABC Ltd based on expected future dividend payments and growth rates. 2) It provides an example calculation where the dividend is expected to grow 6% annually and the stock is valued at $66.67 per share. 3) A second example incorporates a few years of higher dividend growth rates stabilizing at 6% growth, valuing the stock at $70.41 per share under this multi-stage growth model.

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134 views3 pages

Gordon Growth Model Excel Template: Visit: Email

1) The document describes using the Gordon Growth Model to value stock of company ABC Ltd based on expected future dividend payments and growth rates. 2) It provides an example calculation where the dividend is expected to grow 6% annually and the stock is valued at $66.67 per share. 3) A second example incorporates a few years of higher dividend growth rates stabilizing at 6% growth, valuing the stock at $70.41 per share under this multi-stage growth model.

Uploaded by

Jobin John
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Gordon Growth Model Excel Template

Visit: www.educba.com
Email: [email protected]
Let us take the example of ABC Ltd that has planned to pay out a dividend of $2.00 per share
next year and as per the market, the dividend is expected to grow by 6% per year thereafter.
Also, the required rate of return of the investor is 9%. Currently, the stock ABC Ltd is trading in
the market at $50 per share. Determine the intrinsic value of the stock based on the above formula.

Dividend per share to be paid next year (D1) $2


Expected dividend growth rate (g) 6%
Required rate of return of the investor (k) 9%

Using the formula of the Gordon growth model, the value of the stock can be calculated as:
Value of stock = D1 / (k – g)

Value of stock 66.67


Let us take the example ABC Ltd again and assume that the company will increase the dividends
rapidly during the next few years and then stabilize the growth rate. So, in the current year, the
dividend paid is $1.82 per share, but the dividends will grow by 10% and 12%, in the subsequent
two years and then steadily increase by 6% thereafter. The required rate of return of the investor
continues to be 9%. Determine the intrinsic value of the stock based on the above formula
while incorporating the impact of unusual dividend growth.

Required rate of return of the investor 9%

Particulars Year 0 Year 1 Year 2 Terminal value


Dividend paid $1.82
Expected dividend growth rate 10% 12% 6%

Dividend per share is calculated as:


Year 1 Year 2 Terminal value
Dividend per share to be paid $2.00 $2.24 $2.38

Terminal value is calculated as:


Terminal value $79.23

Present Value of Dividend per share is calculated as:


D1 D2 Terminal value
Present Value $1.84 $1.89 $66.68

value of the stock under the multi growth model can be calculated as,
Value of stock $70.41

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