Dividend growth model

For constant sustainable growth g and required equity return ke greater than g, the ex-dividend share value is P0 = D1/(ke − g), where D1 is next year's expected dividend. Rearranging gives ke = D1/P0 + g. The model assumes a stable growth pattern indefinitely and is sensitive to small changes in growth or required return. Use an ex-dividend price and distinguish a dividend just paid from the next dividend. It is less suitable for businesses whose dividends are absent, unstable or not representative of distributions that can be sustained.