Perpetual Growth Model

The Perpetual Growth Model (also known as the Gordon Growth Model) is a simple and elegant tool used in valuation to determine the intrinsic value of a stock. It operates on a big assumption: that a company will pay dividends that grow at a constant rate forever. Think of it like buying a magical goose that lays slightly bigger golden eggs each year, into eternity. The model calculates the present value of all these future, ever-growing dividends to tell you what the stock is worth today. The formula is beautifully simple: Value = D1 / (k - g). Here, D1 is the expected dividend next year, 'k' is your personal required rate of return (the minimum profit you demand), and 'g' is the constant growth rate of the dividend. While its assumption of 'perpetual' growth is a fantasy, it's a powerful mental model for valuing stable, mature businesses and a cornerstone of dividend discount models.

At its heart, the model is a shortcut. Instead of forecasting dividends for hundreds of years and adding them all up, this formula does it in one clean step. But to use it effectively, you must understand its three key ingredients.

The formula, Value = D1 / (k - g), looks simple, but its power and its danger lie in the numbers you plug into it.

• D1: The First Golden Egg

This isn't the dividend the company paid yesterday; it's the dividend you expect it to pay over the next