Gordon Growth Equation (GGM) calculates the stock intrinsic value

Helps in determining a stock’s intrinsic value based on expected future dividends growing at a constant rate

$$P=\frac{D_1}{r-g}$$

where:

• $P$, current stock price
• $D_1$, value of next year dividends
• $g$, expected growth rate
• $r$, constant cost of equity capital

See also

• Compounding is the interest on interest — the GGM is compounding applied to dividends: $P=D_1/(r-g)$ is the sum of an infinite geometric series where each term grows at rate g
• Future Value (FV) calculates the balance after the last payment of a debt — FV and GGM are two sides of the same time-value-of-money framework: FV asks what a present sum grows to, GGM asks what a future dividend stream is worth today
• Migliorare dell’1% porta ad un 37x in un anno — the intuition is the same: small constant growth rate g compounded indefinitely produces the entire present value P; the formula makes the compounding effect explicit