What does the Gordon growth formula express in finance?

The Gordon growth formula, also known as the Gordon-Shapiro model, specifically expresses the relationship between dividends and share prices, particularly for companies expected to grow their dividends at a constant rate indefinitely. The formula calculates the present value of an infinite series of future dividends that are expected to grow at a fixed rate.

In essence, the formula is given as ( P = \frac{D_0 (1 + g)}{r - g} ), where ( P ) is the current price of the stock, ( D_0 ) is the most recent dividend payment, ( g ) is the growth rate of the dividends, and ( r ) is the required rate of return. This highlights the intrinsic relationship between the dividends a company pays and its current stock price.

The other options do not accurately capture the main concept of the Gordon growth formula. While final year free cash flow (as mentioned in one of the options) might be important in certain valuation contexts, it does not specifically relate to the Gordon growth model's focus on dividends. Valuing through the sum of future cash flows is more aligned with discounted cash flow (DCF) methodologies rather than the specific context of the Gordon growth formula. Lastly, the calculation of interest accrued over