From distributions to Gordon’s equation
Let D1 be the dividend at the end of next year, ke annual required equity return and g constant annual growth. Present payments begin D1/(1+ke), then D1×(1+g)/(1+ke)². Each term is multiplied by q=(1+g)/(1+ke). With non-negative payments, ke greater than −1, g≥−1 and g less than ke, the geometric sum converges: P0=D1/(ke−g).[4](#source-gv-ddm-lecture)
The practical domain is narrower: sustainable positive distributions and plausible long-term growth. The numerator is the future payment, not the payment just received. If a company paid 6 roubles and growth is 3%, D1=6×1.03=6.18. At ke=11%, value is 6.18/(0.11−0.03)=77.25 roubles. Using D0 gives 75: a calendar error, not a market judgement.
A small rate gap can change value greatly
With D1=6.18, ke=12% and g=3% gives 68.67 roubles. ke=11% and g=4% gives 88.29. A one-point change works through a small denominator. Show ke−g and the basis of each parameter instead of one price with false precision.
At g=ke, positive payments do not form a finite infinite sum. At g greater than ke, a negative mechanical quotient is not a negative share value; the formula’s applicability condition is broken. As g approaches ke from below, value grows without bound. This is a property of assumptions, not evidence of near-infinite business value.
Payout and reinvestment are linked
Check not only dividend growth but its financing. In a simple sustainable-growth model, g=b×ROE, where b is retained-earnings share and ROE is return on equity under stated assumptions. Growth, payout and reinvestment return cannot be chosen independently.[1](#source-gv-dcf-lecture) Suppose forecast EPS is 10, ROE on new and maintained investment is 12% and required growth is 3%. Then b=0.03/0.12=25%, payout is 75% of earnings and D1=7.50. At ke=11%, value is 93.75 roubles.
This does not prove the company will earn 10. Paying all earnings removes the stated expansion source. Debt or new shares may temporarily finance a distribution, but financing and rights to future cash change. Recheck the model rather than simply increasing the dividend cell.
Zero current dividend does not mean zero business
A company may pay nothing now and begin later. Use an explicit transition: each forecast dividend plus the value of later distributions at the transition date, all discounted to today. In a separate example, D1=0, D2=4, D3=5; after year three growth is 2% and ke=10%. Terminal value at year three is 5×1.02/(0.10−0.02)=63.75. Today’s value of payments and continuation is 54.96 roubles. Do not mix the year-three payment with the next dividend.
If dividends and liquidation distributions are zero forever, that particular cash-flow value is zero. This does not prove the business has no assets; the dividend model may not represent available rights or policy. Buybacks change share count and require consistent treatment. FCFE describes potentially available owner cash, not necessarily an actual dividend.
Application passport
Before concluding, record calendar, rights of the selected share class, earnings forecast, payout ratio, reinvestment, required return and post-transition regime. Cash-flow currency and inflation must match the rate. For a company without a stable payout policy or with rapidly changing operations, one perpetual formula is usually too strong. Comparing with cash flows diagnoses the model but does not guarantee the market will reach the calculated number.
EPS is not the available distribution
In Gordon’s formula the numerator is D1, not EPS1. Continue the stated model: EPS1=10, payout 75%, g=3%, ke=11%. Correct numerator 7.50 gives 93.75. Substituting all earnings, 10, gives 125—one third more without new cash or payout capacity. D1=EPS1 needs a separate full-payout assumption consistent with financing growth. Earnings, FCFE and actual dividends are not interchangeable; restore reinvestment, debt and payout policy first.[1](#source-gv-ddm-lecture)
At a conditional price of 100 and selected-year earnings of 10, earnings yield is 10%. This is accounting earnings divided by price, not ten guaranteed owner roubles and not bond yield to maturity. The share has no stated par redemption here; earnings can disappear and exit price can change. A discount to DDM value is a model-price gap, not contractual protection.