First, we need to calculate the required rate of return. When a stock’s beta equals 1, the required return is equal to the market return, or 10.0%. Thus, k_e = 0.10. Alternative:  Using the capital asset pricing model (CAPM), k_e = R_f + Beta * (R_m – R_f) = 4.5% + 1 * (10.0% - 4.5%) = 4.5% + 5.5% = 10.0%.

Next, we need to calculate the dividends for years 1 and 2.

• D₁ = D₀ * (1 + g)   = 2.50 * (1.10) = 2.75
• D₂ = D₁ * (1 + g)   = 2.75 * (1.10) = 3.03

Then, we use the one-year holding period DDM to calculate the present value of the expected stock cash flows (assuming the one-year hold).

• P₀ = [D₁/ (1 + k_e)] + [P₁ / (1 + k_e)] = [$2.75 / (1.10)] + [$25.0 / (1.10)] = $25.22. Shortcut: since the growth rate in dividends, g, was equal to k_e, the present value of next year’s dividend is equal to last year’s dividend.

Finally, we use the multi-period DDM to calculate the return for the stock if held for two years.

• P₀ = [D₁/ (1 + k_e)] + [D₂/ (1 + k_e)²] + [P₂ / (1 + k_e)²] = [$2.75 / (1.10)] + [$3.03 / (1.10)²] + [$30.0 / (1.10)²] = $29.80. Note: since the growth rate in dividends, g, was equal to k_e, the present value of next year’s dividend is equal to last year’s dividend (for periods 1 and 2). Thus, a quick calculation would be 2.5 * 2 + $30.00 / (1.10)²  = 29.80.