Gordon dividend growth question

Hi all,

When using this equation, when do we use:

D(1+g)/k-g vs D/k-g?

Just tripped up a few questions by using the wrong one. Hope the question is clear!



If you are asked to calculate Price of stock given estimated dividend at Time T+1 you use current dividend compounded with growth rate, D (1+g).

You have to read carefully question with description and given/asked data details as:

  • next year dividend (current x (1+g))

  • last paid dividend D (in time t).

Sometimes you are asked to calculate est. dividend given current dividend, sometimes you are asked with form as “the dividend estimate” or “dividend next year” which is already given in such form in question.

Simillar doubts are within CAPM model with Risk premium or Market return, depends of given details in certain question. As I can find, CFA Institute likes play with words and details in questions, so high level of concentration and careful reading is needed.

The Gordon Growth formula is:

P0 = D1 / (r − g) = D0(1 + g) / (r − g)