Hullo!

sorry for the long winded questions below. Both are related to the number of periods which i am confused about.

**Question 1** which got me stumped on the use of the power (squared or cube) used on this question:

Say ABC Corp is expected to pay a dividend of $2.25 per share this year. Sales & profit for ABC are forecasted to grow at a rate of 20% for 2 yrs and thereafter, grow at 5% per yr forever. Dividend and sales growth are expected to be equal. If ABC’s shareholders require a 15% return, the per share value of ABC’s common stock based on the dividend discount model is closest to:

a. $22.75

b. $26

c. $28.50

The answer is C - $28.50.

P2 = D3/k-g = 2.25(1.2)squared/0.15-0.05 = 32.40

P0 = 2.25/1.15 + 2.70/(1.15)squared + 32.40/(1.15)squared = $28.50

My question is with regards to P2 = D3/k-g = 2.25(1.2) **squared** /0.15-0.05

Shouldn’t it be 2.25 (1.2) **cube** /0.15-0.05 instead?

Reason being the formula for **Pn = D n+1 / (k-g).** Hence, as n=2, shouldn’t **cube** be used instead of **squared?**

**Question 2** concerning the number of periods to use:

A stock with dividends is expected to grow at 20% per year for 4 yrs, thereafter they are expected to grow at 5% per year forever. The last dividend paid was $1 and ke = 10%. Calculate the value of this stock using the multistage growth model.

The answer is as follows:

1.20/1.1 + 1.44/(1.1)squared + 1.73/(1.1)cube + 41.60/(1.1)cube = $34.84

I am very confused over the number of periods to use.

Both questions seem so similar but they each use different periods: 2 for the first one and 3 for the second. To me, i would use 4 periods for the second question because the stock is expected to grow for the first 4 years.

Am i missing something here? Your help is greatly appreciated.

Thanks!