This question uses a two-stage Dividend Discount Model (DDM).

Given:

• D₁ = $2.00
• D₂ = $2.10
• From Year 3 onward: D₃ = $2.21 (constant forever)
• Required return (r) = 10%

Step 1: Present value of early dividends

• PV(D₁) = 2.00 / 1.10 = 1.82
• PV(D₂) = 2.10 / 1.10² = 1.74

Step 2: Terminal value at end of Year 2

From Year 3 onward, dividends form a zero‑growth perpetuity:

Step 3: Discount terminal value to today

• PV(TV) = 22.10 / 1.10² = 18.26

Step 4: Intrinsic value today

Conclusion

• Correct intrinsic value: $21.82 (Option A)
• Option B ($22.10) is only the value at Year 2, not today.
• Option C ($27.31) assumes incorrect timing or growth.