Gordon Growth Model (DDM) formula: intrinsic stock value & implied cost of equity

The #1 valuation mistake: dividing trailing D0 instead of forward D1 = D0*(1+g)!

The Gordon Growth Dividend Discount Model values a mature dividend payer (banks, utilities, REITs) as the present value of a growing perpetuity: IntrinsicValue P0 = D1 / (ke - g), where D1 = D0 × (1 + g) is NEXT year's expected dividend, ke is Cost of Equity, and g is perpetual dividend growth.

For an annual dividend D0 of 2.50, assumed perpetual growth of 4% and required return of 9%, next year’s dividend D1 is 2.60 and modeled value is 52.00. Using D0 instead gives 50.00, about 3.85% below 52.00. The growing-perpetuity model requires g < ke; otherwise this formula has no finite positive valuation under its assumptions.

Assumes annual end-of-period dividends and constant growth and required return forever. Inputs are hypothetical, not forecasts or investment recommendations. Near-equal growth and discount rates make results highly sensitive. Use nonnegative dividends, positive required return, and growth greater than -100%.

Gordon Growth intrinsic value formula (with g >= ke perpetuity guard)

Compounds trailing dividend A2 by (1 + C2) to forward D1 and divides by (ke - g).

=IF(C2 >= B2, "Invalid (g >= ke)", ROUND((A2 * (1 + C2)) / (B2 - C2), 2))

Implied Cost of Equity (ke = D1 / MarketPrice + g)

Returns the required return implied by the supplied price and assumed dividend path within this model. It is not an independently observed or guaranteed future return.

=IF(D2<=0,"Invalid market price",ROUND((A2 * (1 + C2)) / D2 + C2, 4))

Further reading

• Microsoft Support — ROUND function