Explain the relationship observed between the required rate of return, growth rate and the dividend paid, and the estimated value of the stock using the Gordon Model.

Looking for help in valuing financial instruments?

The Gordon Model is a formula used to estimate the value of a company’s stock. According to this model, the value of a stock equals its required return multiplied with its expected future dividends divided by the difference in its long-term growth rate and its required return.

In other words, this relationship shows that as one increases or decreases, so does the other; if an investor’s required rate of return rises then they will demand more dividends in order to make their investment worthwhile which will cause them to lower their estimates for a company’s stock price. Investors will pay more per share if they expect higher dividends. This can lead to higher valuation estimates.

This formula is a good way to determine how many factors could affect the stock’s perceived value. Investors can use this information to better evaluate potential investments and make informed decisions regarding where they should allocate funds.

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