The estimation of present value using the constant growth model involves the calculation of a terminal value.

Question

Quizplus · Accepted Answer

The constant growth model, also known as the Gordon Growth Model, estimates the present value of a dividend-paying stock by dividing the next year's dividend by the discount rate minus the constant growth rate of the dividends, without the calculation of a terminal value. Terminal value is typically used in the context of valuing a business with the assumption of a perpetuity growth rate at the end of the forecast period in other valuation models, such as the Discounted Cash Flow (DCF) model.

The Estimation of Present Value Using the Constant Growth Model