When they ask you to approach a two stage DDM, where it says dividend growth will be 14% for X years, then stabilize to 6%, you are supposed to square it going forward such as :
2.5 X 1.14 for 1st year
2.5 X 1.14^2 for second year
2.5 X 1.14 ^3 for third year and so forth … right?
For those of you who use Schweser, for study session 11 page 136 it shows this being done, but on the following study session on Free Cash Flow, it has an example on answer page 182, where they do not square it in the following year -it seems both are structured in the same way asking the same question. Why would I use exponents on one such example but not the other? Any help will be greatly appreciated!