Stock Price Calculator

Stock Intrinsic Value Calculator (Gordon Growth Model)

Enter values and click "Calculate" to see the estimated intrinsic stock value.

function calculateStockPrice() { var lastDividendInput = document.getElementById("lastDividend").value; var growthRateInput = document.getElementById("growthRate").value; var requiredReturnInput = document.getElementById("requiredReturn").value; var resultDiv = document.getElementById("stockPriceResult"); var lastDividend = parseFloat(lastDividendInput); var growthRate = parseFloat(growthRateInput) / 100; // Convert percentage to decimal var requiredReturn = parseFloat(requiredReturnInput) / 100; // Convert percentage to decimal if (isNaN(lastDividend) || isNaN(growthRate) || isNaN(requiredReturn) || lastDividend < 0 || growthRate < 0 || requiredReturn < 0) { resultDiv.style.backgroundColor = '#f8d7da'; resultDiv.style.borderColor = '#f5c6cb'; resultDiv.style.color = '#721c24'; resultDiv.innerHTML = "Please enter valid positive numbers for all fields."; return; } if (requiredReturn <= growthRate) { resultDiv.style.backgroundColor = '#fff3cd'; resultDiv.style.borderColor = '#ffeeba'; resultDiv.style.color = '#856404'; resultDiv.innerHTML = "Error: Required Rate of Return must be greater than the Expected Dividend Growth Rate for this model to be valid."; return; } // Gordon Growth Model: P = D1 / (r – g) // Where D1 = D0 * (1 + g) var nextDividend = lastDividend * (1 + growthRate); var intrinsicValue = nextDividend / (requiredReturn – growthRate); resultDiv.style.backgroundColor = '#e9f7ef'; resultDiv.style.borderColor = '#d4edda'; resultDiv.style.color = '#155724'; resultDiv.innerHTML = "Estimated Intrinsic Stock Value: $" + intrinsicValue.toFixed(2); }

Understanding Stock Intrinsic Value and the Gordon Growth Model

Investing in the stock market involves more than just looking at current prices; it's about understanding a company's true worth. The concept of "intrinsic value" refers to the actual value of an asset, based on an objective calculation or complex financial model, rather than its current market price. When a stock's market price is below its intrinsic value, it's considered undervalued and potentially a good investment.

What is the Gordon Growth Model?

Our calculator utilizes the Gordon Growth Model (GGM), also known as the Dividend Discount Model (DDM) with constant growth. This model is a popular method for valuing a stock by assuming that dividends grow at a constant rate indefinitely. It's particularly useful for mature companies with a stable history of paying and increasing dividends.

How the Calculator Works (The Formula)

The Gordon Growth Model formula is:

P = D₁ / (r – g)

Where:

• P: The current intrinsic value of the stock.
• D₁: The expected dividend per share for the next year. This is calculated as D₀ * (1 + g), where D₀ is the last annual dividend per share.
• r: The investor's required rate of return (or cost of equity). This is the minimum return an investor expects to receive for taking on the risk of owning the stock.
• g: The expected constant growth rate of dividends, in perpetuity.

Understanding the Inputs:

• Last Annual Dividend Per Share ($): This is the total dividend paid out per share over the past 12 months. You can usually find this on financial statements or reputable financial data websites.
• Expected Dividend Growth Rate (%): This is your estimate of how much the company's dividends will grow each year, expressed as a percentage. This can be based on historical growth, analyst forecasts, or the company's reinvestment rate and return on equity.
• Investor's Required Rate of Return (%): This is your personal hurdle rate for investing in this particular stock. It reflects the risk associated with the investment. A common way to estimate this is using the Capital Asset Pricing Model (CAPM) or simply by considering your desired return given the stock's risk profile compared to other investments.

Example Calculation:

Let's say a company paid a last annual dividend of $2.00 per share. You expect its dividends to grow at a constant rate of 4% per year, and your required rate of return for this stock is 10%.

• D₀ = $2.00
• g = 4% = 0.04
• r = 10% = 0.10

First, calculate D₁ (next year's dividend):

D₁ = $2.00 * (1 + 0.04) = $2.00 * 1.04 = $2.08

Now, apply the Gordon Growth Model:

P = $2.08 / (0.10 – 0.04) = $2.08 / 0.06 = $34.67

Based on these inputs, the intrinsic value of the stock is estimated to be $34.67.

Limitations of the Gordon Growth Model:

While useful, the GGM has several limitations:

• Constant Growth Assumption: It assumes dividends grow at a constant rate indefinitely, which is rarely the case for most companies.
• Required Return > Growth Rate: The model breaks down if the required rate of return (r) is less than or equal to the dividend growth rate (g), leading to an infinite or negative stock price. Our calculator includes a check for this.
• Dividend-Paying Companies Only: It can only be used for companies that currently pay dividends. Growth stocks that reinvest all earnings and pay no dividends cannot be valued with this model.
• Sensitivity to Inputs: Small changes in the growth rate or required rate of return can lead to significant changes in the estimated intrinsic value.

Despite its limitations, the Gordon Growth Model provides a foundational understanding of how future dividends contribute to a stock's present value and serves as a good starting point for dividend-focused investors.