Which financial model is primarily used for valuation purposes?

The Gordon Growth Model is primarily used for valuation purposes, especially when assessing the value of a stock with dividends that are expected to grow at a constant rate. This model simplifies the process of valuing a company by allowing analysts to calculate the present value of an infinite series of future dividend payments that are expected to grow at a steady rate.

The advantage of the Gordon Growth Model is its focus on dividends, which are a tangible return for shareholders, making it especially useful for valuing mature companies in stable industries. It is heavily utilized when the growth rate of dividends can be reasonably estimated and is expected to remain consistent over time.

While other models like the Capital Asset Pricing Model (CAPM) are important for understanding expected returns and risk, they are not primarily focused on valuation. The Dividend Discount Model (DDM) is also a valuation method specifically for dividends but can sometimes encompass a broader range of growth scenarios. The Discounted Cash Flow (DCF) Model is comprehensive and considered a key valuation tool as well, focusing on cash flows rather than just dividends. However, the Gordon Growth Model's specificity to constant growth in dividends makes it particularly notable for simple valuation cases.