Glossary›Gordon Growth model
Gordon Growth model
Also known as: Perpetuity growth model
The Gordon Growth model is a formula for valuing something that is expected to generate cash forever, growing at a constant rate. It was originally built to value a based on its , but the same formula is commonly borrowed inside a to calculate , the lump sum representing everything beyond the explicit forecast years.
The formula is:
Final year cash flow x (1 + ) / ( - )The has to stay below the , or the formula produces a nonsense result, dividing by zero or by a negative number.