MonkeyBusiness

You have to bear in mind that it is 2ND YEAR DIVIDEND which will grow at a constant rate of 6%.

That is D2 of 1.56 will grow constantly at 6%.

So, we need to calculate P1 and not P2.

P1 = D2/(k - g) = 1.56/(.10 - .06) = 39.06

P0 = 1.25/1.1 + 39.06/1.1 = 36.65

It is a little tricky in the beginning. ALWAYS see which is the FIRST dividend figure grwoing at a constant rate and then calculate for Price, 1 yr before that.