How Do I Calculate Stock Value Using the Gordon Growth Model in Excel?
The Gordon growth model (GGM), or the dividend discount model (DDM), is a model used to calculate the intrinsic value of a stock based on the present value of future dividends that grow at a constant rate.
The model assumes a company exists forever and pays dividends that increase at a constant rate. It has advantages as well as disadvantages.
To estimate the value of a stock, the model takes the infinite series of dividends per share and discounts them back into the present using the required rate of return. The result is a simple formula, which is based on the mathematical properties of an infinite series of numbers growing at a constant rate.
Key Takeaways
- The Gordon growth model calculates a stock's intrinsic value.
- The model bases the intrinsic value of stocks on the present value of future dividends that grow at a constant rate.
- Doing the calculation in Excel is simple, as you enter only five numbers into Excel cells.
- The Gordon growth model is also known as the dividend discount model (DDM).
Understanding the Gordon Growth Model
The intrinsic value of astock can be found using the formula (which is based on mathematical properties of an infinite series of numbers growing at a constant rate):
Intrinsicvalue of stock = D1 / (k - g)
D1 is the dividend per share one year from now, k is the investor's required rate of return, and g is the expected dividend growth rate.
How to Calculate Intrinsic Value Using Excel
Using the Gordon growth model to find intrinsic value is fairly simple to calculate in Microsoft Excel.
To get started, set up the following in an Excel spreadsheet:
- Enter "stock price" into cell A2
- Next, enter "current dividend" into cell A3.
- Then, enter the "expected dividend in one year" into cell A4.
- In cell A5, enter "constant growth rate."
- Enter "Required Rate of Return" in cell A6.
For example, suppose you are looking at stock ABC and want to figure out the intrinsic value of it. Assume you know the growth rate in dividends and also know the value of the current dividend.
The current dividend is $0.60 per share, the constant growth rate is 6%, and your required rate of return is 22%.
To determine the intrinsic value, plug the values from the example above into Excel as follows:
- Enter $0.60 into cell B3.
- Enter 6%into cell B5.
- Enter 22% into cell B6.
- Now, you need to find the expected dividend in one year. In cell B4, enter "=B3*(1+B5)," which gives you 0.64 for the expected dividend, one year from the present day.
- Finally, you can now find the value of the intrinsic price of the stock. In cell B2, enter "=B4/(B6-B5)."
The current intrinsic value of the stock ABC in thisexample is $3.98 per share.
