Stock Valuation Calculator
Estimate a stock's intrinsic value by blending the Gordon Growth Model (DDM) with an earnings-based P/E approach. Use it when deciding whether a dividend-paying stock is overvalued or undervalued before buying or selling.
About this calculator
This calculator blends two classic valuation methods. The Dividend Discount Model (DDM) component uses the Gordon Growth Model: DDM Value = D₁ / (r − g), where D₁ = currentDividend × (1 + g/100) is next year's dividend, r is the required rate of return, and g is the expected dividend growth rate. The earnings-based component is simply EPS × P/E ratio, reflecting what the market pays per dollar of earnings in the same industry. The two estimates are weighted 60% DDM and 40% P/E: Intrinsic Value = (DDM Value × 0.6) + (EPS × P/E × 0.4). Comparing this blended value to the current market price tells you whether the stock appears cheap or expensive relative to fundamentals.
How to use
Suppose a stock pays a $2.00 annual dividend, growing at 4% per year. Your required return is 9%, EPS is $5.00, and the industry P/E is 18×. D₁ = $2.00 × 1.04 = $2.08. DDM Value = $2.08 / (0.09 − 0.04) = $2.08 / 0.05 = $41.60. P/E Value = $5.00 × 18 = $90.00. Blended Intrinsic Value = ($41.60 × 0.6) + ($90.00 × 0.4) = $24.96 + $36.00 = $60.96. If the stock trades below $60.96, it may be undervalued.
Frequently asked questions
What is the Gordon Growth Model and when is it valid for stock valuation?
The Gordon Growth Model (GGM) values a stock as the present value of all future dividends growing at a constant rate: Value = D₁ / (r − g). It is most valid for mature, dividend-paying companies with stable, predictable growth. The model breaks down when the expected growth rate g approaches or exceeds the required return r, or when a company pays no dividend at all.
Why does this calculator weight DDM at 60% and P/E at 40%?
The 60/40 weighting reflects the view that for dividend-paying stocks, cash-flow fundamentals (captured by the DDM) are the primary driver of intrinsic value, while market sentiment and peer comparisons (captured by the P/E multiple) play a secondary role. Different analysts use different weightings depending on sector and personal methodology. The blended approach reduces reliance on any single model's assumptions.
How do I choose the right required rate of return for a stock?
The required rate of return is the minimum annual return you need to justify the investment's risk. A common approach is to use the Capital Asset Pricing Model: r = risk-free rate + β × (market premium), where β measures the stock's volatility relative to the market. For a quick estimate, many investors use 8–12% for large-cap stocks and higher rates for riskier small-cap or growth stocks.