Computation of Expected Dividend for Coming Year (D1):

Let us assume:

Dividend in year 0 = D0

Hence:

D1 = D0 * 1.12

D2 = D0 * 1.12^ 2

D3 = D0 * 1.12^3

D4 = D0 * 1.12^3 * 1.08

 

Hence:

Horizon value of stock at the end of year 3 = D4 /(r - g)

= D0 * 1.12^3 * 1.08 / (16% - 8%)

= D0 * 18.9665

 

Given that:

Stock currently sells for 33.60 per share.

Hence:

33.60 = D0 * 1.12/1.16 + D0 * 1.12^ 2 / 1.16^ 2 + D0 * 1.12^3 / 1.16^3  + D0 * 18.9665/1.16^3

33.60 = D0 * (1.12/1.16 + 1.12^ 2 / 1.16^ 2 + 1.12^3 / 1.16^3 + 18.9665/1.16^3)

33.60 = D0 * 14.94885

D0 = 33.60 / 14.94885

D0 = $2.2477 or $2.25

 

Hence:

Projected dividend for the coming year = D0 * 1.12

= 2.2477 * 1.12

= $2.5174 or $2.52

So, Projected dividend for the coming year is $2.52