Stock Valuation Calculator – Loan calculator

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Reviewed by: **Jennifer Lee, CFA, MBA**
Chartered Financial Analyst (CFA) specializing in equity research and fundamental stock valuation using dividend discount models.

The **Stock Valuation Calculator** uses the Gordon Growth Model (GGM) to determine the intrinsic value of a stock based on its expected future dividends. Enter values for any three parameters (Expected Dividend, Required Rate of Return, Perpetual Growth Rate, or Intrinsic Value) to solve for the missing one.

Stock Valuation Calculator (GGM)

Instructions: Enter values for any three of the four core parameters to solve for the missing one.

Valuation Parameters

Expected Dividend Next Year ($D_1$) – [P]

Required Rate of Return (%) ($K$) – [F]

Perpetual Growth Rate (%) ($G$) – [V]

Intrinsic Stock Value ($P_0$) – [Q]

Stock Valuation Formula (Gordon Growth Model)

The GGM is based on the discounted cash flow analysis, specifically the present value of a perpetuity with growth:

Intrinsic Value ($P_0$):

$$P_0 = \frac{D_1}{K – G}$$

Where $K > G$ must be true for the formula to be valid.

Formula Source: Investopedia

Variables Explained (P, F, V, Q – Parameters)

$D_1$ (Expected Dividend, $P$): The expected dividend payment per share next year.
$K$ (Required Return, $F$): The minimum rate of return an investor seeks (often the cost of equity, or CAPM).
$G$ (Perpetual Growth, $V$): The constant, expected annual growth rate of the dividends (must be less than $K$).
$P_0$ (Intrinsic Value, $Q$): The estimated fair price of the stock per share today.

Related Investment & Discounting Calculators

Further analysis of dividend growth and discounting:

What is Stock Valuation?

Stock valuation is the process of determining the theoretical “fair market value” or intrinsic value of a company’s stock. Investors use valuation models to compare a stock’s intrinsic value against its current market price. If the intrinsic value is higher than the market price, the stock is considered undervalued (a “buy”); if the intrinsic value is lower, it is considered overvalued (a “sell”).

The Gordon Growth Model (GGM) is one of the simplest and most widely used valuation methods, particularly for mature companies with stable dividend payments. It assumes that dividends will grow at a perpetual, constant rate, making it a powerful tool for valuing stocks that fit this profile.

How to Calculate Intrinsic Value (Example)

Imagine a stock is expected to pay a dividend of \$3.00 next year ($D_1$), the investor requires a 12% return ($K$), and the dividend is expected to grow by 5% perpetually ($G$). We are solving for $P_0$:

Step 1: Calculate the Denominator (K – G)
Denominator = $12\% – 5\% = \mathbf{7\%}$ (or 0.07).
Step 2: Apply the GGM Formula
$P_0 = D_1 / (K – G) = \$3.00 / 0.07 \approx \mathbf{\$42.86}$.
Step 3: Decision Making
If the stock is currently trading at \$35.00, its intrinsic value (\$42.86) suggests it is undervalued and potentially a good investment.

The estimated Intrinsic Stock Value is $\mathbf{\$42.86}$ per share.

Frequently Asked Questions (FAQ)

When is the Gordon Growth Model most accurate?

The GGM is most accurate for large, financially stable, and mature companies that have a history of paying and steadily increasing dividends, and whose growth rate is expected to stabilize over the long term.

What happens if the required return ($K$) is less than the growth rate ($G$)?

If $K \leq G$, the formula mathematically produces a negative or infinite value, which is impossible. This constraint ($K > G$) reflects the reality that a company cannot perpetually grow dividends faster than its cost of capital or the overall economy.

Is $D_1$ the last dividend paid?

No. $D_1$ must be the expected dividend **one year from now**. If you only know the dividend paid today ($D_0$), you must estimate $D_1$ using the formula: $D_1 = D_0 \times (1 + G)$.

Does this model work for non-dividend paying stocks?

No. Since the model relies entirely on future dividend payments, it is not applicable to growth stocks or companies that do not currently issue dividends.

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