What is the Gordon growth model formula?

P0 = D1 ÷ (r − g), where D1 is next year's dividend, r the required return and g the constant dividend growth rate.

What is the difference between D0 and D1?

D0 is the dividend just paid; D1 = D0(1 + g) is the next one expected. The model uses D1.

Why must r be greater than g?

Otherwise the dividends grow faster than they are discounted and the value would be infinite (or negative in the formula).

Which companies suit the Gordon model?

Mature, stable dividend payers such as utilities and consumer staples whose dividends grow steadily.

Gordon Growth Model Formula (DDM)

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Gordon Growth Model Calculator

The Gordon growth model, also called the constant-growth dividend discount model, values a share as the present value of all its future dividends, assuming they grow at a constant rate g forever. Because that stream is a growing perpetuity, the value collapses to P₀ = D₁ ÷ (r − g), where D₁ is next year’s dividend and r is the return shareholders require.

Formula

P₀ = D₁r − g = D₀ × (1 + g)r − g

Where

P₀: intrinsic value of the share today
D₁: dividend expected one year from now
D₀: dividend just paid
r: required rate of return (cost of equity)
g: constant dividend growth rate forever (g < r)

Calculator

The dividend you enter is

Dividend per share

Required return (r) (%)

Dividend growth rate (g) (%)

Result and step-by-step solution

Intrinsic value per share

41.60

Implied dividend yield 5% + growth 4% = required return 9%.

Next year’s dividend
D₁ = 2.00 × (1 + 0.04) = 2.08
Spread
r − g = 0.09 − 0.04 = 0.05
Value
P₀ = 2.080.05 = 41.60

How to use the formula

Be careful which dividend you enter. If you have the dividend just paid, D₀, the model needs D₁ = D₀(1 + g); the calculator lets you choose and does the conversion. The required return is often estimated with the CAPM, and a sustainable growth rate as retention ratio × ROE.

With a dividend of 2.00 just paid, 4% growth and a 9% required return, D₁ is 2.08 and the share is worth 41.60. Rearranged, the model says required return = dividend yield + growth: 2.08 ÷ 41.60 = 5% plus 4% = 9%. The result is very sensitive to r − g, and the model only works when r is greater than g. For companies growing fast now but slower later, use the two-stage dividend discount model.

Frequently asked questions

What is the Gordon growth model formula?: P₀ = D₁ ÷ (r − g), where D₁ is next year’s dividend, r the required return and g the constant dividend growth rate.
What is the difference between D0 and D1?: D₀ is the dividend just paid; D₁ = D₀(1 + g) is the next one expected. The model uses D₁.
Why must r be greater than g?: Otherwise the dividends grow faster than they are discounted and the value would be infinite (or negative in the formula).
Which companies suit the Gordon model?: Mature, stable dividend payers such as utilities and consumer staples whose dividends grow steadily.

Last reviewed: September 26, 2026. Calculations run in your browser and were checked against numpy-financial, SciPy and published spreadsheet examples.