When is the Gordon (single-stage) DDM appropriate and what are its key assumptions?

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The Gordon Growth Model values equity as V₀ = D₁ / (r − g), where D₁ is next-period dividend, r is required return, and g is the perpetual growth rate. It assumes: (1) dividends grow forever at a constant rate g, (2) g < r (otherwise the model explodes), (3) the firm pays dividends (not just any cash flow), and (4) payout ratio and retention policy are stable. 'Steady state' means the firm has reached a mature phase where ROE, retention, and therefore g are not changing. Gordon fits: regulated utilities, mature consumer staples, established REITs — companies with predictable cash flows and dividend policies anchored to long-run economic growth. For Zephyr Utility at g=4%, r=9%: V₀ = D₁ / 0.05. If D₁ = $3.20, V₀ = $64. Sensitivity is brutal: change g to 4.5% and V₀ jumps to $71.11 (+11%). Change r to 8.5% and V₀ rises to $71.11 as well. This r−g denominator is the Achilles' heel. ```mermaid flowchart TD A[Mature Firm] --> B{Dividend
Paying?} B -->|Yes| C{Stable
Growth?} C -->|Yes| D{g Less
Than r?} D -->|Yes| E[Gordon
Appropriate] D -->|No| F[Model
Breaks] C -->|No| G[Use Multi
Stage DDM] ``` Rule of thumb: g should not exceed long-run nominal GDP growth (~4-5% in developed markets). If your target g implies the company grows faster than the economy forever, that's impossible — it would eventually become larger than GDP. For Zephyr, 4% is defensible as long-run nominal growth proxy, so Gordon is reasonable.

When is the Gordon (single-stage) DDM appropriate and what are its key assumptions?

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