Gordon Growth Model (Perpetuity Growth Method)
Definition
The Gordon growth model values a stream of cash flows growing at a constant rate forever: value = next-period cash flow / (discount rate − growth rate), i.e., PV = CF1 / (r − g). In a DCF terminal value, TV at year N = FCF in year N x (1 + g) / (WACC − g). In its original dividend form, share price = next year's dividend / (cost of equity − dividend growth rate).
The formula requires g < r; as g approaches r, value explodes toward infinity, which is why the terminal growth rate must be modest — typically at or below long-run nominal GDP growth or inflation, since no company can outgrow the economy in perpetuity.
It assumes constant growth, constant discount rate, and a stable, mature business — reasonable only after an explicit forecast period has brought the company to steady state (margins, capex near depreciation, stable working capital).
Why interviewers ask
Interviewers test the exact formula — the most common error is using year-N cash flow without growing it by (1 + g), or picking a terminal growth rate above GDP. Quick-math versions also appear ("what's the value of $100 growing at 3% forever discounted at 8%?" — 100 x 1.03 / 0.05 = 2,060, or 100/0.05 = 2,000 if $100 is already next year's flow — state your assumption).
Related terms
Interviews don't test definitions — they test recall under pressure.
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