The Gordon-Shapiro model (or Gordon Growth Model, Dividend Discount Model) is a single-stage equity valuation formula that derives the value of a company's equity as the present value of a perpetuity of growing dividends: V = D1 / (Ke − g), where D1 is the expected next-year dividend, Ke is the cost of equity, and g is the long-term sustainable growth rate. It is the theoretical foundation of the terminal value calculation in a DCF model and underpins the relationship between the WACC, growth, and valuation multiples.

The Gordon-Shapiro model derives a fundamental relationship between the WACC, the growth rate, and the implied EBITDA multiple: EV/EBITDA = (1 − tax rate) × (1 − reinvestment rate) / (WACC − g). This shows why higher growth companies command higher multiples (g ↑ → multiple ↑) and why higher-risk companies trade at lower multiples (WACC ↑ → multiple ↓). The model also shows that above a certain WACC-g spread, multiples compress rapidly — a key sensitivity in Franco-Swiss mid-market valuations where the WACC typically ranges from 8–14%.

The model's main limitation is its single-stage structure: it assumes constant growth in perpetuity, which is unrealistic for most companies. In practice, DCF models use a multi-stage approach — explicit free cash flow projections over 5–10 years, followed by a terminal value computed using the Gordon formula at a sustainable long-term growth rate (typically 1–3% in the Franco-Swiss market). The terminal value typically represents 60–80% of total enterprise value in a standard DCF, making the Gordon formula's assumptions critical to the overall valuation.

At Hectelion, we apply and stress-test the Gordon-Shapiro formula in our DCF-based valuations and provide detailed sensitivity analysis on the WACC-g pair for Franco-Swiss companies.