A constant growth stock model assumes is a stock whose dividends will grow at a constant rate (g) that is less than the required return (r ). If dividends grow at a constant rate, you can value stock as a growing perpetuity, denoting next year’s dividend as D₁ . The value of a constant growth stock is calculated using the following equation:

P₀ = D₀ * ( 1+g)/(r-g) = D₁ / (r-g)

where

• P₀ = the stock price at time 0,
• D₀ = the current dividend,
• D₁ = D₀ * ( 1+g), the next dividend (i.e., at time 1),
• g = the growth rate in dividends, and
• r = the required return on the stock, and
• g < r