Gordon Growth Model
Definition
A method of calculating terminal value in a discounted cash flow analysis by dividing the terminal year free cash flow by the difference between the discount rate and the terminal growth rate. The Gordon Growth Model must not be applied where the terminal growth rate is within two percentage points of the discount rate, as the formula becomes mathematically unstable and produces implausible outputs in that range.
Common Misapplication
The most common misapplication is applying a terminal growth rate that approaches or exceeds the discount rate. Where the terminal growth rate equals the discount rate, the denominator becomes zero and the formula produces an infinite terminal value. Where the terminal growth rate slightly exceeds the discount rate, the formula produces a negative terminal value. Both conditions indicate a modeling error.
FFI Standard Reference
This term is defined and applied in Book 4, Section 4.2: Discounted Cash Flow Analysis.
Related Terms
Citable URL
This term may be cited using the following permanent URL.
Full citation format: Founder Financial Infrastructure Standard, Beta v0.5, Glossary: Gordon Growth Model. https://ffistandard.org/glossary/gordon-growth-model/. 2026.