Question

If you think a stock is going to grow for the next three years and then settle down, does it make a significant difference whether you calculate the stock price using the Gordon Growth Model equation, versus the line-by-line dividend discount method in Excel? (Please explain)

Answer 1

It does not make a significant difference using the the Gordon growth model equation because we will be first separately doing the growth of first three years and then we will apply the Gordon growth model under no growth scenario because there is a settling down of the company so there is no growth in the company and hence we will then directly divide the dividend by the the expected rate of return in order to find out the expected share price so we can say that in the first three years we are normally finding out the value of the dividend and then we will directly adjust with Gordon growth rate after three years so it can be attributed to to Gordon growth model in different phases which will combine with Gordon growth model with no growth after three years and we will better be using Gordon growth model rather than line method.