Gordon’s Valuation Model
The Gordon valuation model is a method for estimating the intrinsic value of a stock. It is based on the idea that the value of a stock is equal to the present value of all future dividends that the stock is expected to pay.
The formula for the Gordon valuation model is:
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P = D1 / (r – g)
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where:
* P is the intrinsic value of the stock
* D1 is the expected dividend at the end of the first year
* r is the required rate of return
* g is the growth rate of dividends
The following example illustrates how the Gordon valuation model can be used to estimate the intrinsic value of a stock.
ABC Ltd. has a current dividend of Rs. 10 per share. The company’s required rate of return is 12%, and the expected growth rate of dividends is 10%. Using the Gordon valuation model, the intrinsic value of ABC Ltd.’s stock is:
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P = Rs. 10 / (0.12 – 0.10) = Rs. 83.33
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As you can see, the Gordon valuation model is a relatively simple method for estimating the intrinsic value of a stock. However, it is important to note that the model is based on a number of assumptions, and the accuracy of the results will depend on the accuracy of these assumptions.