Gordon Growth Model

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  • Topic: Stock market, Investment, Stock
  • Pages : 3 (682 words )
  • Download(s) : 209
  • Published : November 28, 2012
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What is Gordon Growth Model,

“This model is use to determine the fundamental value of stock, it determines the value of stock based on sequence or series of dividends that matured at a constant rate , and the dividend per share is payable in a year”

Stock Value (P) = D / (k – G)--------------Equation 1 Where D= Expected dividend per share one year from now G= Growth rate in dividends k= required rate of return for equity investor

This model is useful to find the value of stock, with following assumption should be taken into account while calculating value of stock, which are: 1. That dividends remains to grow continuously on a constant rate 2. The growth rate should remain less than the required return on equity

Relationship between monetary policy and stock market

Monetary policy is a state owned measure which is an an important determinant of stock prices , lowering of increase in interest rate couzld be use by fedration to influence stock prices. it is very useful to find the“value of stock“. Monetary policy effetcs stock prices in two ways:

1.

When in certain circumstances when the federations or the controller of monetray policty lowers interests rates, the return on bonds or securities (which is also considered as an alternative assest to stocks) decreses, this results that the investors who have invested ,are ready or accept to receive a lower required rate of return on an investment in equity. This will automatically reduces the amount of equity , hence it will also lower the (k – G) (denominator in Gordon Growth model). The lowering of this denominator will lead to increase in the value of stock (price of stock). Hence it will increase stock prices. The lowering of interest rate is also a way from the federation to stimulate and energise the economy, this will help to have a higher growth rate in dividends. The rise in dividends can also results the denominator (k – G) to decrease, it also results in higher stock prices .

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