Constant Growth Dividend Discount Model Calculator

Constant Growth DDM Formula:

\[ P_0 = \frac{D_0 (1 + g)}{r - g} \]

Estimated Stock Price (P₀):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is the Constant Growth DDM?

The Constant Growth Dividend Discount Model (also known as the Gordon Growth Model) estimates the intrinsic value of a stock based on future dividends that grow at a constant rate. It assumes dividends will continue to grow at a steady rate indefinitely.

2. How Does the Calculator Work?

The calculator uses the Constant Growth DDM formula:

\[ P_0 = \frac{D_0 (1 + g)}{r - g} \]

Where:

\( P_0 \) — Current stock price (USD)
\( D_0 \) — Current dividend per share (USD)
\( g \) — Constant dividend growth rate (decimal)
\( r \) — Required rate of return (decimal)

Explanation: The model discounts all expected future dividends back to present value, assuming they grow at a constant rate forever.

3. Importance of Stock Valuation

Details: This model helps investors determine whether a stock is overvalued or undervalued based on its dividend-paying characteristics. It's particularly useful for valuing mature companies with stable dividend growth.

4. Using the Calculator

Tips: Enter current dividend in USD, growth rate as decimal (e.g., 0.05 for 5%), and required return as decimal. Ensure required return > growth rate.

5. Frequently Asked Questions (FAQ)

Q1: When is the constant growth DDM most appropriate?
A: For mature, stable companies with a history of steady dividend growth that is expected to continue indefinitely.

Q2: What are limitations of this model?
A: It doesn't work for non-dividend paying stocks or companies with unstable growth rates. The assumption of perpetual constant growth may be unrealistic.

Q3: How do I determine the required rate of return?
A: Typically the investor's opportunity cost or the company's cost of capital. CAPM is often used to estimate this.

Q4: What if growth rate exceeds required return?
A: The model breaks down (denominator becomes negative). This suggests the company is in a high-growth phase where this model isn't appropriate.

Q5: Can this model value companies that don't pay dividends?
A: No, alternative models like free cash flow models would be more appropriate for non-dividend paying companies.