The Gordon growth model in hotel valuation

“valuation arguments” are really arguments about two things:
1. What cash flow is truly sustainable
2. What perpetuity assumptions you’re willing to defend

One compact framework that connects the dots is the Gordon Growth Model (GGM)—and its tactical applications in DCF terminal value and terminal value multiples.

1) Intrinsic Value (Dividend Perpetuity)
For mature, dividend-paying hospitality companies:
P0 = D1 / (r − g)

Where:
• D1 = next year dividend
• r = required return (cost of equity)
• g = perpetual dividend growth

Illustrative ₹ example:
If D1 = ₹10, r = 12%, g = 5%
Intrinsic Value ≈ 10 / (0.12 − 0.05) = ₹143 per share

Non-negotiable rule: r must be greater than g.

Risk note (for transparency): In most professional models, risk is already embedded in r (via market risk premium, beta, etc.).
However, when you believe “case-specific risk” isn’t fully captured—you can disclose an explicit risk premium (RP):

Adjusted GGM:
P0 = D1 / [(r − g) + RP]
(Where RP is a small add-on, illustratively 1%–3%, used sparingly and disclosed.)

2) Terminal Value in DCF (the real battleground)
In most DCFs, terminal value carries a disproportionate share of enterprise value. Gordon logic reappears as a cash-flow perpetuity:

TV = FCF(n+1) / (WACC − g)

This is conceptually clean because it values the business on distributable cash, not accounting profits.

Risk transparency (optional):
TV = FCF(n+1) / [(WACC − g) + RP]
(Again: disclose it, because you are explicitly increasing the risk-adjusted spread.)

Discounting logic (often missed):
If terminal value is calculated using WACC, then in a standard enterprise DCF it is logical to discount the terminal value back to present value using the same WACC (because TV is an enterprise cash flow value).

3) The Gordon-based Terminal Value Multiple (TVM)
Once you write terminal value as a perpetuity, the “multiple” becomes transparent:

TVM(FCF) = TV / FCF(n+1) = 1 / (WACC − g)
Or with explicit risk disclosure:
TVM(FCF) = 1 / [(WACC − g) + RP]

Translation: your terminal multiple is simply a function of risk and perpetual growth—not a negotiating number.

4) EBITDA vs FCF for Terminal Value: deal language vs cash reality
FCF-based TV
Pros: respects capex + refurb cycles + working capital; best for asset-heavy hotels; reduces risk of inflated value.
Cons: forecasting capex/tax/WC requires discipline; can look noisy during openings/repositionings.

EBITDA-based TV (common in practice)
Pros: easy peer comparability; widely used in hotel deals; less noisy than near-term FCF.
Cons: EBITDA is not cash; can overstate value when maintenance capex is real; needs a bridge from EBITDA → FCF (cash conversion factor)

Inbox me if i may clarify.