NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
In the dividend discount model with constant growth (Gordon model), the value of a share today is computed as:
Under the constant growth dividend discount model, share value equals the next expected dividend (D1) divided by the cost of equity minus the perpetual growth rate. This is the present value formula of a growing perpetuity, requiring cost of equity to exceed growth.
- AD1 divided by (ke minus g)Correct
- BD0 divided by (ke plus g)
- CD1 multiplied by (ke minus g)
- DD0 divided by ke minus g
Explanation
The Gordon growth model values a share as next year's expected dividend divided by the difference between the cost of equity and the constant growth rate. Using ke plus g or multiplying would not discount a growing perpetuity correctly.
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