Gordon Growth Model Explained: Valuation Formula and Uses 2026

The Gordon Growth Model (GGM), also called Gordon's growth model or the constant growth model, values a business or a share from a cash flow that grows at a constant rate forever.

Gordon Growth Formula:  Value = CF₁ ÷ (r − g)

where CF₁ is next year's cash flow (dividend, FCFE or FCFF), r is the discount rate and g is the long-term growth rate.

In a DCF valuation, the model is used to calculate terminal value at the end of the forecast period:

Terminal Value = FCFF × (1 + g) ÷ (WACC − g)

Quick example: FCFF $100M, g 4%, WACC 10% → TV = 100 × 1.04 ÷ 0.06 = $1,733M, then discount back by (1 + WACC)⁵ → $1,076M today.

Below you will find the FCFF, FCFE and dividend versions of the Gordon growth formula, how to estimate the growth rate, how to back out cost of equity, a free Gordon Growth Model calculator and Excel template, a WACC-vs-growth sensitivity table, and the calculation errors that break the model.

What Is the Gordon Growth Model?

The Gordon Growth Model (also known as the Gordon Growth Formula) is a valuation framework used to estimate the present value of an asset based on cash flows that are expected to grow at a constant rate indefinitely. It is traditionally calculated using dividends, where the value of a stock is estimated based on dividends expected to grow at a stable rate over time.

In practice, the model is not limited to dividends. It is applied more broadly to value different types of cash flows, including Free Cash Flow to Firm (FCFF), Free Cash Flow to Equity (FCFE) and dividends. If you are unsure which cash flow to use, see our guide to FCFF vs FCFE. By capitalising these cash flows using an appropriate discount rate, the model provides a structured way to estimate value under steady-state conditions.

In simple terms, the model answers a fundamental question: what is a business worth today based on the cash it can generate over time, assuming stable long-term growth?

You will see the same model under several names: Gordon Growth Model, GGM, Gordon's growth model, the constant growth model, the perpetuity growth method (when used for DCF terminal value) and the Gordon dividend growth model or constant-growth DDM (when applied to dividends). They all describe the same formula — a single cash flow capitalised at the spread between the discount rate and the growth rate.

Gordon Growth Terminal Value Formula (FCFF)

The most common use of the Gordon Growth Model is the perpetuity growth method for terminal value in a Discounted Cash Flow (DCF) model. Terminal value captures every cash flow beyond the explicit forecast period, and it is widely used by valuation professionals, investment bankers, financial analysts and auditors when building DCF models.

TV = FCFF × (1 + g) ÷ (WACC − g)

•     TV: terminal value at the end of the forecast period

•     FCFF: free cash flow to firm in the final forecast year (Year n)

•     g: long-term perpetual growth rate — must be lower than WACC

•     WACC: weighted average cost of capital

•     FCFF × (1 + g): converts the final-year cash flow into next year's cash flow (FCFF₁)

This version calculates the enterprise value of a business because FCFF is available to both debt and equity holders. Once the terminal value is calculated, it is discounted back to present value and combined with the forecast cash flows to determine total enterprise value.

Discounting the terminal value back: TV sits at the end of the forecast period, so its present value is TV ÷ (1 + WACC)ⁿ, where n is the number of forecast years. Add this to the present value of the Years 1–n cash flows to get enterprise value.

Why g must be below WACC: if g equals or exceeds WACC, the denominator (WACC − g) is zero or negative and the formula returns an infinite or negative value. In practice g is capped near long-run nominal GDP growth (2–4%).

Gordon Growth Model Calculator (Free) + Excel Template

Use the calculator below to estimate terminal value using the Gordon Growth Model. Select the type of cash flow, enter the final forecast-year amount, the perpetual growth rate and the discount rate, and the calculator will estimate the terminal value and its present value.

Use the following combinations:

•     FCFF with WACC

•     FCFE with cost of equity

•     Dividends with cost of equity

Important: the perpetual growth rate must always be lower than the applicable discount rate.

Download the Gordon Growth Model Excel Template

Use our downloadable Excel template to calculate terminal value using FCFF, FCFE or dividends. The template also includes a discount-rate and growth-rate sensitivity table.

Download Template

The Gordon Growth Model Formula: FCFF, FCFE and Dividend Versions

The Gordon Growth Model works by converting a stream of future cash flows that grow at a constant rate into a single present value. Instead of projecting cash flows indefinitely, the model assumes that once a business reaches a stable phase, its cash flows grow at a steady, sustainable rate over time.

This allows valuation professionals to simplify long-term projections into a structured formula, where value is determined by three key factors: expected cash flows, growth rate and the required return. Value increases with higher cash flows and growth, and decreases with higher risk.

Depending on the type of cash flow, the Gordon Growth Formula can be applied at both the enterprise value and equity value levels.

1. FCFF Approach (Enterprise Value)

Enterprise Value = FCFF₁ ÷ (WACC − g)

•     FCFF₁: free cash flow to firm expected in the next period

•     WACC: weighted average cost of capital

•     g: long-term growth rate

In practice, this formulation is used to calculate the terminal value at the end of the forecast period in a DCF model. FCFF₁ is derived by growing the final forecast-year cash flow at the long-term growth rate (g), reflecting the transition to a stable growth phase.

2. FCFE Approach (Equity Value)

Equity Value = FCFE₁ ÷ (Ke − g)

•     FCFE₁: free cash flow to equity expected in the next period

•     Ke: cost of equity

•     g: long-term growth rate

This approach applies the Gordon Growth Model to cash flows available to equity shareholders. It is used to estimate equity value directly, and can also be applied to terminal value when the valuation is performed from an equity perspective.

3. Dividend Approach (Traditional Model)

Value = D₁ ÷ (Ke − g)

•     D₁: expected dividend in the next period

•     Ke: cost of equity

•     g: growth rate in dividends

This is the traditional Dividend Discount Model (DDM) and the original form of the Gordon model. It is covered in more detail in the Gordon Dividend Growth Model section below.

Gordon Growth Rate Formula: How to Estimate g

The Gordon growth rate is the constant rate at which cash flows are assumed to grow forever. It is the most sensitive input in the model, so it should be estimated, not guessed.

Sustainable growth rate:  g = Retention Ratio × Return on Equity

where Retention Ratio = 1 − Dividend Payout Ratio. A company that retains 40% of earnings and earns a 12% ROE has a sustainable growth rate of 0.40 × 12% = 4.8%.

Practical guardrails for g:

•     Keep g below the discount rate (WACC or cost of equity) — otherwise the formula is invalid.

•     Keep g at or below long-run nominal GDP growth (typically 2–4% for US-dollar cash flows). A business cannot outgrow the economy forever.

•     Cross-check against industry growth, inflation expectations and the company's reinvestment rate.

•     Test a range (1–4%) in a sensitivity table rather than relying on a single point.

If the business is still growing faster than this, extend the explicit forecast period or use a two-stage Gordon growth model instead of applying stable growth too early. This is common for startup and growth-stage valuations.

Cost of Equity Using the Gordon Growth Model

The same formula can be rearranged to estimate the cost of equity (Ke) from a company's current share price, next-year dividend and growth rate. This is the dividend-growth approach to cost of equity, often used alongside CAPM.

Cost of Equity:  Ke = (D₁ ÷ P₀) + g

•     D₁: expected dividend next year (= D₀ × (1 + g))

•     P₀: current share price

•     g: expected dividend growth rate

Example: share price $50, next-year dividend $2.00, growth 4% → Ke = 2.00 ÷ 50 + 0.04 = 4% + 4% = 8%.

What happens if cost of equity rises? Because value = D₁ ÷ (Ke − g), a higher Ke widens the denominator and the share price falls, all else equal. A higher g has the opposite effect.

Limitations: the approach only works for dividend-paying companies with stable growth, and it is very sensitive to g. Most valuation professionals use it as a cross-check against CAPM rather than as the primary estimate. The resulting Ke also feeds into the WACC formula used to discount FCFF.

Gordon Dividend Growth Model (Constant-Growth DDM)

The original form of the Gordon Growth Model is a dividend discount model (DDM): the value of a share equals next year's dividend divided by the spread between cost of equity and dividend growth.

Value per Share = D₁ ÷ (Ke − g)

Example: current dividend $2.00, growth 4%, cost of equity 9%. D₁ = 2.00 × 1.04 = $2.08. Value = 2.08 ÷ (0.09 − 0.04) = $41.60 per share.

Does intrinsic value grow at g? Yes. Under the model, both dividends and share price grow at the same constant rate g each year, so the dividend yield (D₁ ÷ P₀) stays constant.

The dividend version suits mature, stable dividend payers such as utilities, consumer staples and banks. For companies that pay no dividend, use the FCFE or FCFF version of the formula above.

How the Formula Is Used in Practice (DCF Context)

In real-world valuation, the Gordon Growth Model is most commonly used to estimate terminal value within a Discounted Cash Flow (DCF) model. Terminal value is critical because it captures the value of a business beyond the explicit forecast period. Since forecasting cash flows indefinitely is not practical, a steady-state assumption is applied and the Gordon Growth Model converts these long-term expectations into a single value.

A typical DCF process involves:

•     Forecasting free cash flows (FCFF or FCFE) over a defined period

•     Identifying the point at which the business reaches stable growth

•     Applying the Gordon Growth Model to calculate the terminal value

•     Discounting projected cash flows and terminal value to present value using WACC or cost of equity

•     Deriving enterprise value or equity value, and adjusting for debt to arrive at intrinsic value per share

Beyond the model itself, valuation also depends on:

•     Cash flow projections

•     Discount rate assumptions

•     Sustainable growth estimates

•     Capital structure considerations

In practice, the Gordon Growth Model is less a standalone formula and more a critical component that captures the continuing value of a business within a DCF framework — one of several business valuation methods an appraiser will reconcile.

Understanding Discount Rates in the Gordon Growth Model

The choice of discount rate depends on the type of cash flow being valued, as it reflects the perspective of the investor.

•     WACC (Weighted Average Cost of Capital): used when applying the model to FCFF. It represents the required return for all capital providers, including both debt and equity holders, and is therefore used to estimate enterprise value.

•     Cost of Equity (Ke): used when applying the model to FCFE or dividends. It reflects the return expected by equity investors and is used to estimate equity value directly.

Selecting the appropriate discount rate ensures consistency between the cash flows being valued and the risk being measured.

Applications and Practical Use in Valuation

The Gordon growth method is not just a theoretical valuation technique. It forms a critical component of modern DCF valuation.

Terminal Value in DCF Models (Primary Use Case)

The Gordon Growth Model is widely used to calculate a business's continuing value beyond the explicit forecast period. This makes it a critical component in valuation exercises for financial reporting and tax compliance, including 409A valuation, ASC 820 fair value measurement and ASC 805 business combinations.

Equity and Enterprise Valuation

The model can be applied to both FCFF and FCFE to estimate enterprise value or equity value, particularly for businesses that have reached a stable, steady-state phase with predictable cash flows.

Investment Analysis

The model supports long-term investment analysis by helping assess the sustainability of cash flows and the relationship between growth and required return.

Beyond financial reporting, the Gordon Growth Model is widely used in mergers and acquisitions, private equity transactions, fairness and valuation opinions, investment banking, strategic planning and long-term equity research. Because it provides a structured approach to estimating continuing value, it remains one of the most widely accepted valuation methods for mature businesses with stable and predictable cash flows.

Where Does It Work Well?

•     Mature businesses with stable cash flows

•     Predictable, low-volatility industries

•     Companies operating in steady-state growth environments

When Should the Gordon Growth Model Be Avoided?

•     High-growth or early-stage companies

•     Businesses with volatile or unpredictable cash flows

•     Companies undergoing significant structural or market changes

•     Environments with high uncertainty or instability

Valuation professionals rarely rely on the model in isolation. Instead, it is integrated into broader valuation frameworks, where it supports terminal value estimation and long-term assumptions. The emphasis remains on applying realistic inputs, validating data and ensuring consistency with market conditions.

Assumptions of the Gordon Growth Model

The reliability of the Gordon Growth Model depends on a set of core assumptions that define where the model is applicable and where it may produce unreliable results.

•     Constant growth: cash flows (FCFF, FCFE or dividends) grow at a fixed rate indefinitely.

•     Steady-state business conditions: the company operates in a mature phase with predictable performance, stable margins and limited volatility.

•     Growth less than discount rate: g must remain lower than WACC or cost of equity to ensure a valid and stable valuation outcome.

•     Sustainable cash flow generation: the business generates consistent, normalised cash flows that can be maintained over the long term.

These assumptions make the model simple and effective for stable businesses, but they also limit its applicability in dynamic, high-growth or transitional scenarios.

How the Gordon Growth Model Works: Step-by-Step Example

To understand how the Gordon Growth Model is used in a real-world DCF valuation, let's calculate the terminal value using a practical example.

Assumptions

•     Final-year FCFF (Year 5) = $100 million

•     Long-term growth rate (g) = 4%

•     Weighted average cost of capital (WACC) = 10%

Step 1: Calculate Next Year's Free Cash Flow

The Gordon Growth Model uses the cash flow expected in the first year after the forecast period.

FCFF₁ = FCFF × (1 + g) = $100M × 1.04 = $104 million

Step 2: Apply the Terminal Value Formula

TV = FCFF × (1 + g) ÷ (WACC − g) = 104 ÷ (10% − 4%) = 104 ÷ 6% = $1,733 million

This represents the estimated value of all future cash flows beyond Year 5, assuming they continue growing at a constant rate forever.

Step 3: Discount the Terminal Value to Present Value

Because the terminal value is calculated at the end of Year 5, it must be discounted back to today's value.

PV of TV = TV ÷ (1 + WACC)⁵ = 1,733 ÷ (1.10)⁵ ≈ $1,076 million

Interpretation: the present value of the terminal value is approximately $1.076 billion. In a complete DCF valuation, this amount is added to the present value of the projected cash flows for Years 1–5 to determine the total enterprise value of the business.

FCFE Terminal Value Example

The Gordon Growth Model can also be applied to Free Cash Flow to Equity.

•     Final-year FCFE: $20 million

•     Long-term growth rate: 3%

•     Cost of equity: 11%

FCFE₁ = $20M × 1.03 = $20.6 million

Terminal Equity Value = $20.6M ÷ (11% − 3%) = $257.5 million

This represents the equity value at the end of the forecast period. It must be discounted back to the valuation date using the cost of equity.

Gordon Growth Sensitivity Analysis

The Gordon Growth Model is highly sensitive to changes in WACC and the perpetual growth rate. The following table uses final-year FCFF of $100 million.

Terminal value increases when the perpetual growth rate rises and decreases when WACC rises. The valuation becomes especially sensitive when the difference between WACC and the growth rate becomes small, which is why valuation professionals test multiple assumptions instead of relying on a single result.

Variations of the Gordon Growth Model

While the standard model assumes constant growth, growth is rarely constant in practice. Several variations account for different growth phases.

•     Gordon constant growth model: the basic version with perpetual, stable growth.

•     Two-stage Gordon growth model: an initial high-growth phase followed by stable growth.

•     Adjusted models: incorporate changing growth rates or risk factors to improve accuracy.

Gordon Growth Model vs Exit Multiple Method

The Gordon Growth Model is the perpetuity growth method for terminal value; the exit multiple method applies a market multiple (EV/EBITDA or EV/Revenue) to final-year metrics instead. Most DCF models calculate both and reconcile them — see our full comparison of the Gordon Growth Model vs exit multiple method.

Common Misconceptions About the Gordon Growth Model

•     "It is only a dividend model": while commonly introduced using dividends, it is fundamentally a constant-growth perpetuity framework applied to FCFF and FCFE in DCF valuation.

•     Confusion with DCF models: the Gordon Growth Model is not a complete valuation method on its own. It is a component within the DCF framework, most commonly used to estimate terminal value.

•     Universal applicability: the model is most effective for mature businesses with stable, predictable cash flows and less reliable for high-growth or volatile businesses.

•     Over-reliance on growth rates: small changes in g can significantly impact valuation. Unrealistic assumptions distort results.

Common Gordon Growth Model Calculation Errors

Even when the formula appears simple, small calculation errors can materially affect the valuation result.

A terminal value calculation should also be reviewed against market multiples, transaction evidence and the company's expected long-term financial performance.

Conclusion

The Gordon Growth Model remains the standard way to estimate terminal value in a DCF and a useful cross-check for cost of equity and share value. Its output is only as good as three inputs: next-year cash flow, the discount rate and a defensible long-term growth rate — and small changes in g or WACC move the result significantly, which is why every terminal value should be tested in a sensitivity table and reconciled against market multiples.

At AcumenSphere, we apply the Gordon Growth Model inside a complete valuation framework for 409A valuation, ASC 820 fair value, ASC 805 purchase price allocation, ASC 350 impairment testing and commercial valuations. If you are building a DCF, preparing for an audit or need an independent valuation, call +1 510 203 9584, email info@acumensphere.com or use our contact form.