Stock Price – Constant Growth Model Demo: Value Stocks with the Gordon Growth Formula

The Stock Price – Constant Growth Model tool estimates the fair value of a stock assuming its dividends grow at a constant rate. It is based on the Gordon Growth (Dividend Discount) Model, a classic framework in equity valuation. By entering a few key inputs, you can calculate a theoretical stock price and explore how changes in required return or growth assumptions affect that value.

What the Constant Growth Model Tool Does

The calculator focuses on three main inputs:

• Last Dividend (D₀): The most recent dividend paid by the company.
• Expected Return (r): Your required rate of return for holding the stock.
• Growth Rate (g): The constant annual rate at which dividends are expected to grow.

Using these inputs, the tool computes today’s stock price P₀ under the constant growth assumption. This model is particularly useful for stable, dividend-paying companies where long-term growth can reasonably be approximated as constant.

The calculator displays:

• Theoretical stock price based on D₀, r, and g,
• Whether the model-implied price is higher or lower than the current market price,
• How sensitive the valuation is to changes in the required return.

Core Formula

The model calculates today’s stock price using the Gordon Growth equation:

P₀ = D₀ × (1 + g) / (r − g)

Here, D₀ × (1 + g) represents the next expected dividend D₁, and the denominator (r − g) adjusts this growing dividend stream for both the investor’s required return and the assumed perpetual growth rate.

The result is the theoretical price an investor should be willing to pay given those assumptions. You can then compare:

• Model-implied price vs. actual market price,
• Whether the stock appears overvalued or undervalued under your inputs.

Simulation and Sensitivity

A dedicated simulation section varies the required return r while holding D₀ and g constant. For each value of r, the tool recalculates the stock price using the same constant growth formula. This allows you to:

• Visualize how valuation changes as your required return rises or falls,
• See the inverse relationship between r and P₀: when r increases, the model price decreases; when r decreases, the model price increases,
• Understand how sensitive your valuation is to small changes in discount rate assumptions.

By adjusting D₀, r, and g, you can reflect your own view of the company’s dividend policy and risk profile, then use both the main output and the simulation table to interpret the stock’s theoretical value.

Applications

The Constant Growth Model tool is useful for:

• Equity investors checking whether a dividend-paying stock seems overpriced or underpriced,
• Portfolio managers and analysts performing quick dividend-based valuations,
• Students and educators learning how the Gordon Growth Model works in practice,
• Financial planners illustrating the impact of growth and discount rate assumptions on long-term value.

It is especially appropriate for mature companies with stable dividend growth patterns, rather than highly speculative or non-dividend-paying stocks.

Why Move from Excel to the Web?

Many Gordon Growth and dividend discount models start life as Excel spreadsheets. However, sharing them with clients or teams and keeping versions consistent can be challenging. By converting the model into a web application with SpreadsheetWeb, you gain:

• Browser-based access no spreadsheet software required,
• A single, controlled version of the valuation logic,
• Interactive inputs with instant recalculation and visualization,
• Easy embedding into websites, investor portals, or learning platforms.

This approach makes it simpler to distribute valuation tools and ensures everyone works with the same assumptions and formulas.

Interactive Demo

Use the live Stock Price – Constant Growth Model Demo to:

• Enter the last dividend (D₀), required return (r), and growth rate (g),
• Instantly compute the theoretical current price P₀,
• Compare the model-implied value to the stock’s market price,
• Explore how changing r or g affects the stock’s valuation via the simulation table.

This helps you form a more informed view on whether a stock’s price aligns with your expectations for dividends, growth, and risk.

FAQ

What does the Constant Growth Model tool do?
It estimates the fair value of a stock assuming dividends grow at a constant rate, using the Gordon Growth (Dividend Discount) Model.

What formula does it use?
The calculator uses P₀ = D₀ × (1 + g) / (r − g), where D₀ is the last dividend, r is the required return, and g is the constant dividend growth rate.

What assumptions are required?
Key assumptions include a constant growth rate in dividends, r greater than g (r > g), and a stable dividend-paying company.

Who can use this calculator?
Investors, analysts, students, and finance professionals who want to value dividend-paying stocks or study dividend discount models.

Can I test different return and growth scenarios?
Yes. You can adjust D₀, r, and g directly, and use the simulation section to see how changes in the required return affect the theoretical stock price.

Can I embed this calculator on my website?
Yes. With SpreadsheetWeb, you can embed calculators and models on your website or share them as secure standalone web applications with custom branding.

Disclaimer: This calculator is provided for informational and educational purposes only. The results are based on user-entered data and standard formulas and do not constitute financial, investment, or trading advice. Calculations are illustrative and may not reflect actual market conditions, transaction costs, taxes, or other investment considerations. Users should verify all results independently and consult a qualified financial professional before making any investment decisions.