Gordon Growth Model
Short definition
The Gordon model values a cash flow growing at a constant rate forever as C_1/(r−g). g should not exceed the economy’s nominal growth cap and must sit below r.
Detailed explanation
The assumption: margin, ROIC and reinvestment are consistent in perpetuity. g = ROIC × reinvestment. When ROIC = WACC, growth does not create value; a high g is not optimism by itself.
In high inflation g is nominal. In a real DCF g is real. Mixing them explodes TV.
Why it matters for the CFO
g is the most sensitive terminal input. One point of g often moves EV more than explicit-period cash.
How it is calculated
P_0 = C_1 / (r − g) (DCF terminal: FCFF_{n+1} / (WACC − g))
Variables in the formula
- g: Constant perpetual growth rate
- r: Discount rate (WACC or Ke)
How to read it
As g → r, TV → ∞. That is where the model breaks, not “high value”.
Numerical example
FCFF_1 40 mn TL, r 18%, g 4% → value = 40 / 0.14 ≈ 286 mn TL.
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Definitions are educational. They are not investment, credit or tax advice.