**H-Model**

For many companies, we expect the growth rate of earning to decrease over time as competitors enter the market. Typically, the growth rate does not drop to a low level all at once. instead, the growth rate is likely to decrease over time. The **H-model** is a variation to the standard dividend growth model first proposed by Myron J. Gordon to model a **declining growth rate**. In particular, the H model can be used to model a *linearly* declining growth rate.

On this page, we discuss the H model definition, provide the H-model formula and finally implement the H-model in Excel. The dividend growth model calculator is available at the bottom of the page.

**H-Model definition**

In most cases, the long-term growth rate does **not **drop abruptly from the high growth rate to the low growth rate. Instead, we can imagine that the growth rate slowly declines to the long-term growth rate. This can easily be accomplished using the H-model.

Before we continue, there is one important aspect we need to stress. The H-model is an **approximation**. That means that the result will not be exactly equal to the value if we model each of the cash flows separately. The approximation will be more accurate

- the shorter the high-growth period
- the smaller the spread between the short-term and the long-term growth rate

The H in the H-model refers to a particular parameter that we have to calculate. In particular, H is the **half-life** of the model. This parameter captures the speed at which the growth rate converts to the long-term growth rate. It is calculated as follows

where **t** is the length of the high growth period.

**H-model formula**

Once we have the H, the full H-model formula looks as follows:

where **D0 **is the current dividend, **gS **is the short-term growth rate, **gL **is the long-term growth rate, and r is the required rate of return.

**H-model interpretation**

The first term is what the shares would be would be worth if there was only a low growth period. The second term is an approximation of the value that results from the linearly declining high-growth phase.

**H model example**

Finally, let’s put the formulas to work. The following table implements the above formulae to calculate the fundamental value of a growth company. The spreadsheet can be downloaded using the link reported below.

**Summary**

We discussed the H-model, a simple formula to approximate the value of a company for which we expect the high growth rate to decline linearly to a lower long-term growth rate.

### H-model calculator Excel

Want to have an implementation in Excel? Download the Excel file: H-model implementation