This is a bit confusing. Here’s my approach. Maybe it’s the same, or maybe not?

Let’s consider a particular stock. This year the dividend was D. We expect the dividend to grown at rate R. Our discount rate is K. This represents the rate of growth we expect from a stock. We want to calculate P, the maximum price we should pay for the stock in order to achieve a return better than K.

The present value of the stock is the sum of the present value of all the future dividends.

After year 1, we get a dividend D. The present value is D.

After year 2, we get a dividend D * (1+R). The present value is D * (1+R) / (1+K)

After year 3, we get a dividend D * (1+R)^2. The present value is D * (1+R)^2 / (1+K)^2

The price P is the sum of all these present values.

This results in Gordon’s formula:
http://en.wikipedia.org/wiki/Stock_valuation

When R