Ok, so the question goes like this:
A company paid a dividend per share of $8 yesterday. Because of unusual high growth, the dividend is expected to increase by 20 % annually for the next two years. Thereafter a growth of 8 % is expected in all foreseeable future. Your required annual return is 20 %.
How much are you willing to pay for this stock today? Ignore any tax consequences.
So here is my thinking:
1) Since it paid out yesterday the next payout will happen in one year. Since our required return is 20 %, we discount by 1.20 for each period.
2) After the first two years we have a perpetuity. The present value of the cashflow is what we're willing to pay.
This is not the correct answer. Where is my attempt at logic wrong?