A growing dividend perpetuity
The Gordon growth model, the constant-growth dividend discount model, values a share as the present value of dividends that grow at one rate forever. Enter next year’s expected dividend D1. If you only have a just-paid D0, multiply it by 1 + growth first. Required return must exceed growth, or the perpetuity has no finite price. CAPM is one way to estimate the required equity return.
If you have D0, D1 = D0 × (1 + growth)
Implied forward dividend yield = D1 ÷ P0 = required return − growth
Example
A $2.00 next-year dividend, 10% required return, and 4% perpetual growth has a 6% capitalization rate. Value is $2.00 ÷ 0.06 = $33.33. A $4.00 dividend at 12% required return and 4% growth is $50. Zero growth is a level perpetuity: $2.00 ÷ 10% = $20.
What this model leaves out
Use this single-stage model for a stable dividend-paying firm whose leverage, payout, and growth can remain sustainable. Perpetual growth should be consistent with the valuation currency and long-run economy. Multi-stage growth, buybacks, and changing payout ratios stay outside it. Values become extremely sensitive when required return approaches growth; negative growth is allowed.