I am looking at Kaplan, book 4, page 318, questions #8 & 9. I’m trying to figure out why the answer does not discount the year 2 constant growth to the 2nd power. This is the question #9 from the book:

Q9) Dividend grows at 25% for two years, after which growth will fall to a constant rate of 6%. If the discount rate is 10%, and most recently paid dividend was $1 the value of the Brown’s st ock using the multistage dividend discount model is:

Answer per the book: $36.65 (because they divided the constant dividend model by 1.1, not 1.1 squared as I think it should be).

The formula for a constant growth stock says P(t) = D(t+1)/(r-g). In other words, either

the price at any point in time is based on the NEXT expected dividend, or (Alternately)

If you use a dividend to calculate a price using the constant growth formula, you’ll get a price that is as of one period before the dividend.

So, since you’re using the “time 2” dividend, you get a “time 1” price (i.e. what the stock will be worth one year from today. That’s why it is discounted one year instead of two.