Assume that a stock is expected to pay dividends at the end of year 1 and year 2 of $1.25 and $1.56, respectively. Dividends are expected to grow at a 5% rate thereafter. Assuming that cost of equity is 11%, what is the value of the stock? Please show your work. I will post the response after a couple of responses.

$24.55? 1.25/1.11 + (1.56 + 1.56*1.05/.06)/1.11^2

1.25/1.11+((1.56/(.11-.05))/1.11^2) = 22.22

1.56*1.05/.06= 27.3/(1.11^2) + (1.25/1.11) + 1.56/(1.11^2) =22.1573 + 1.126 + 1.2661 = 24.55

^ Using the same calculation as above, I also got $24.55 Can someone explain why the last term (the constant term, after the two dividends) is squared and not cubed? I know that this is the way to solve it, I was just never certain WHY.

I got $24.55 PV: Yr. 1 = 1.25/1.11 Yr. 2 = 1.56/(1.11)^2 + $27.30/(1.11)^2 = 1.12 + 1.27 + 22.16 TOTAL = 24.55