What is the Gordon growth model?
invented in the 1950s by Myron Gordon, the Gordon Growth is a financial equation used to determine the value of shares. As a different view of the model of discounted cash flow, it takes into account the dividend equation on the share, the rate of return and the growth rate of dividends. This method of deduction is used primarily with stable blue chips. Gordon's equation is widely accepted, but can have several restrictions.
Gordon growth model is a change in cash flow model. The cash flow model is also a financial equation, but includes a wider range of products. By exploring incoming and outgoing finances, the cash flow model can provide current values of projects, companies and assets. This basic tool is slightly beveled and applied to the stock market in the Gordon model.
To determine the value of the stock, three information is necessary .nd the growth rate (g). In order to properly perform a Gordon growth model, G must first be deducted from K. This result must then be divided by D.The resulting number will be the approximate value of any stock. The accuracy of this equation depends on the assumption that the shares will continue next year to determine the dividend at the share. Therefore, it usually applies only to shares with blue chips due to their reliability.
The expected increased value of the shares is not the only dubious aspect of the Gordon growth model. Financial experts must also worry if the value K and G is too close, because the results will not be accurate. The equation also does not work with growth reserves because it does not pay dividend. When these problems appear, various financial techniques must be used to determine the stock value.
Myron J. Gordon, Professor of Finance at the University of Toronto, published the Gordon Growth in 1959. Although he taught mostly in Canada, Gordon was an American citizen and served as president of the US Financial Association from 1975 to 1976. In honor of his lasting contributions to study finance he was appointed the Royal Community.