Here is is the problem: X corporation is expected to pay a dividend of 2.25 per share this year. Sales and profit for X will grow at 20% for 2 years and then at 5 % after the 2 years forever. Dividend sales growth are expected to be equal. If X shareholders requierea 15 % return, the per share value of X common stock based onthe dividend discount model is closest to:

22.75

26.00

28.50

So these are the steps I am following:

I project the dividend growth for 2 years then forever at 5 and discount it back I get 32.40.Using the D3/k-g, that’s for the dividend.

Here is where I get confused: P0=2.25/1.15+2.70/1.15^2+32.40/1.15^2=28.50

why are we discounting again the dividend, isn’t that what I just did in the first forumula?

If you could please explain what’s the logic to find out the PV? thank you in advance!

Because you are discounting from 2.70 which is the second dividend growth period. To get to their answer 28.50 you should start a step back and discount from 2.2, not 2.70

So basically you project forward using K-G and then backwards or PV with K, is that right?