Valuation Updated November 2026

Gordon growth model

The Gordon growth model values a cash flow that grows forever at a constant rate g: value = CF_1 / (r - g), where CF_1 is next year's cash flow. In a DCF the terminal value is FCF_n x (1 + g) / (WACC - g), with g below the discount rate.

Syntax

TV = FCF_n x (1 + g) / (r - g)

Part	What it is
`FCF_n`	Final forecast year cash flow (or dividend, for a stock)
`g`	Constant perpetual growth rate
`r`	Discount rate: WACC for UFCF, cost of equity for dividends

Examples

FCF_n = 50, g = 3%, r = 8%
=50 * (1 + 3%) / (8% - 3%)

Result: 1,030

FCF_n = 200, g = 2%, WACC = 10%
=200 * 1.02 / (10% - 2%)

Result: 2,550

Implied EV/EBITDA when TV = 2,550 and EBITDA_n = 300
=2550 / 300

Result: 8.5x

Compare to trading multiples to test whether g is reasonable.

Common mistakes

Using the current year cash flow without growing it: the model needs the first cash flow after the forecast, FCF_n x (1 + g).
Setting g close to r: the denominator collapses and the value becomes meaningless; keep g at or below long-run nominal GDP growth.
Applying the formula to a cash flow that is not yet stable (negative, or with capex far above D&A).

Practice Gordon growth model

These drills check your answer on live data, free, no account needed.

Terminal value by perpetual growthValue the business with five forecast years plus a terminal value. Fill the discount factors (row 7), present values (row 8), the terminal value at year 5 using growth in B3 (B10: next year's cash flow divided by rate less growth), its present value (B11) and enterprise value (B12).
Terminal value grid by rate and growthShow how sensitive the growth-based terminal value is. Fill B5:E8 with the final cash flow in B2 grown once by the growth rate in row 4, divided by the discount rate in column A less that growth rate.

Questions

What growth rate should I use for terminal value?

Usually 1% to 3% nominal for developed markets. It cannot exceed long-run economic growth forever, and it should be consistent with the capex and reinvestment in the final year.

Is the Gordon growth model the same as the dividend discount model?

It is the constant-growth form of the DDM: price = D1 / (ke - g). In a DCF the same formula is applied to free cash flow with WACC as the rate.

Terminal valueTerminal value captures all cash flows after the forecast period. Perpetuity growth and exit multiple formulas with examples, and how to discount it right.
Exit multipleThe exit multiple method sets terminal value as final year EBITDA times a market multiple. Worked example, present value at WACC and the implied growth check.
DCF model stepsThe six steps of a DCF: forecast unlevered free cash flow, set WACC, compute terminal value, discount it all, bridge to equity value and divide by shares.
WACCWACC = E/V x cost of equity + D/V x cost of debt x (1 - tax rate). Cost of equity from CAPM, market value weights, an example giving 9.0% and common errors.