According to the Dividend Discount Model (Gordon Growth Model), what is the intrinsic value of a stock with a constant dividend growth rate?

Explanation

Core Concept: The Gordon Growth Model calculates equity price P0 = D1 / (r − g), where D1 is the expected next period dividend (D0 × (1+g)), r is required return on equity, and g is constant dividend growth rate. Context/Distractors: Option A incorrectly uses D0 instead of next year’s dividend D1. Option D is an unlevered firm valuation formula. Exam Tip/Key Fact: For Gordon Growth Model to hold, required return ‘r’ must be strictly greater than dividend growth rate ‘g’.