Which valuation model is primarily concerned with forecasting growth rates?

The Constant Growth Model, also known as the Gordon Growth Model, is specifically designed to value a stock or a company based on the assumption of a perpetual growth rate in dividends. This model focuses heavily on forecasting growth rates, as it assumes that dividends will grow at a constant rate indefinitely. In the formula, the expected growth rate is a crucial input, determining the present value of future dividends.

This approach is particularly useful for companies that are stable and expected to produce predictable cash flows over time. By emphasizing the growth rate, the model enables investors to understand how future cash flows can change based on the anticipated growth of dividends, rather than relying solely on current earnings or cash flows.

Other models like the Free Cash Flow Model and Dividend Discount Model do consider growth, but they typically handle it in a more complex or varied manner, incorporating both growth and discount aspects in different ways. Market Multiple Analysis relies more on comparing valuation ratios across similar companies rather than forecasting growth in a focused manner. Therefore, the Constant Growth Model stands out in its dedicated approach to evaluating and forecasting growth rates.