Question

What is next year's dividend or D1 if the dividend growth rate in year 1 is 25%, in year 2 is 15%, and in year 3 is 10%. After year 3 the dividend is expected to grow at a constant rate of 6% indefinitely. The required return is 12% per year, while the current stock price is $27.94

Answer 1

D1 is $ 1.50

Step-1:Calculation of last paid dividend
As per dividend discount model, current share price is the present value of future dividends.
Present value of 3 years dividend:
Year	Dividend	Discount factor	Present value
a	b	c=1.12^-a	d=b*c
1	$       1.25	0.892857	$       1.12
2	$       1.44	0.797194	$       1.15
3	$       1.58	0.71178	$       1.13
Total			$       3.39
Present value of dividend of 4 years thereafter	=	D4*(1+g)/(Ke-g)*DF4			Where,
	=	$    19.88			D3	=	$       1.58
					g	=	6%
					Ke	=	12%
					DF3	=	0.71178
Present value of all future dividends	=	$       3.39	+	$    19.88
	=	$    23.27
Last paid dividend	=	$    27.94	/	$    23.27
	=	$       1.20
Step-2:Dividend of next year
Dividend for the coming year	=	$       1.20	*	1.25
	=	$       1.50