The AI (ChatGPT) Dividend Handbook: Gordon Growth Model
Here is the response from ChatGPT for the prompt gordon growth model entered on June 13, 2023
- D0 represents the most recent dividend paid.
- g denotes the expected constant growth rate of dividends.
- r represents the required rate of return or discount rate.
The Gordon Growth Model, also known as the Dividend Discount Model (DDM) with constant growth, is a valuation method used to estimate the intrinsic value of a stock based on its expected dividends and a constant growth rate. This model assumes that dividends grow at a constant rate indefinitely.
The formula for the Gordon Growth Model is as follows:
Intrinsic Value = D0 * (1+g) / (r - g)
Where:
The required rate of return () is the minimum return an investor expects to earn from the investment. It is typically determined by considering factors such as the risk-free rate of return, the company's risk profile, and the expected return from alternative investments with similar risk.
The constant growth rate () represents the expected rate at which dividends will grow in the future. It is important to note that the growth rate () should be lower than the required rate of return () to ensure a meaningful valuation. If the growth rate exceeds the required rate of return, the formula will yield an infinite value, which is not practical.
It's worth mentioning that the Gordon Growth Model has its limitations. It assumes that the company's dividends will grow at a constant rate indefinitely, which may not hold true in reality. It also does not account for other factors that can affect stock value, such as changes in market conditions or the company's financial health. Therefore, it is important to use the Gordon Growth Model as one tool among others when evaluating the value of a stock and consider its assumptions in the appropriate context.
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