What is the standard formula for the implied value of equities using dividends and growth?

What is the standard formula for the implied value of equities using dividends and growth?

• A. Value = Dividend1 / (Ke - g)
• B. Value = Dividend1 * (Ke - g)
• C. Value = Dividend1 / Ke
• D. Value = Dividend1 - Ke

Answer: (A)

The value of a stock using dividends and growth is given by the Gordon Growth Model: P0 = D1 / (Ke - g). Here, D1 is the dividend expected next year, Ke is the cost of equity (the required return by investors), and g is the constant growth rate of dividends. This formula represents the present value of an infinite, perpetually growing dividend stream, discounted at the required rate. The denominator Ke − g measures how much of a return investors require beyond the growth in dividends; a higher growth rate increases the value only if Ke stays the same, while a higher Ke lowers the value. It also requires Ke > g for a finite, meaningful value. If growth is zero, it reduces to D1/Ke. The other options don’t reflect the present value of a growing perpetuity: multiplying by (Ke − g) or using Ke alone or subtracting Ke from the dividend doesn’t yield the correct PV interpretation.

The value of a stock using dividends and growth is given by the Gordon Growth Model: P0 = D1 / (Ke - g). Here, D1 is the dividend expected next year, Ke is the cost of equity (the required return by investors), and g is the constant growth rate of dividends. This formula represents the present value of an infinite, perpetually growing dividend stream, discounted at the required rate. The denominator Ke − g measures how much of a return investors require beyond the growth in dividends; a higher growth rate increases the value only if Ke stays the same, while a higher Ke lowers the value. It also requires Ke > g for a finite, meaningful value. If growth is zero, it reduces to D1/Ke. The other options don’t reflect the present value of a growing perpetuity: multiplying by (Ke − g) or using Ke alone or subtracting Ke from the dividend doesn’t yield the correct PV interpretation.