What does "g" represent in the Gordon Growth Model?

In the Gordon Growth Model, "g" represents the perpetual growth rate. This is a key parameter in the model that reflects the expected constant rate at which cash flows (usually dividends) will grow indefinitely. The model is used to calculate the present value of an infinite series of cash flows that grow at this constant rate.

The concept of a perpetual growth rate is crucial because it allows investors to estimate the value of an investment based on its expected cash flows over the long term, incorporating the assumption that these cash flows will grow at a steady rate. This makes it particularly useful for valuing companies with stable growth rates and provides insight into long-term investment potential.

Understanding this growth rate is essential for applying the Gordon Growth Model effectively, as it directly influences the valuation outcome. The accuracy of "g" can significantly affect the calculated value of the investment, making it a central focus in financial modeling within this context.