In the Gordon Growth Model, the price today is D1/(r − g). What does D1 represent?

• A. Next period dividend
• B. Current period dividend
• C. Dividend growth rate
• D. Required return

Answer: (A)

In the Gordon Growth Model, the stock price is the present value of all future dividends that grow at a constant rate. D1 is the dividend expected to be paid next period (the next year). If the most recent dividend is D0 and dividends grow at rate g, then D1 = D0(1+g). The formula P0 = D1/(r − g) comes from valuing the infinite series of future dividends starting next year. D1 is the first cash flow, and dividing by (r − g) reflects discounting future growing payments at the required return r minus the growth rate g. So the correct interpretation is the next period dividend.