What is the formula for the constant growth model in stock valuation?

The formula for the constant growth model, often referred to as the Gordon Growth Model, is represented as ( V_{cs} = \frac{D_1}{K_{cs} - g} ). This formula is used to calculate the present value of a stock that is expected to grow its dividends at a constant rate indefinitely.

In this formula, ( V_{cs} ) represents the current value of the stock, ( D_1 ) is the expected dividend in the next year, ( K_{cs} ) is the required rate of return for the equity holder, and ( g ) is the constant growth rate of the dividends. The model operates under the premise that dividends will grow at a stable rate and that this growth can be reliably predicted.

The relationship expressed is crucial because it shows how the value of the stock is directly proportional to the expected future dividend while being inversely affected by the difference between the required rate of return and the growth rate of dividends. This aspect captures the essential principle of finance where the value of an asset is fundamentally linked to its anticipated future cash flows, adjusted for risk.

Understanding this model provides insights into how investors can evaluate the worth of a stock based on expected growth in dividends, making