Firm XYZ is expected to pay dividends of D1 = ₹2.00 and D2 = ₹3.00 over the next two years. From year 3 onwards, dividends will grow at a constant rate of 4% per year. If the discount rate is 10%, what is the present intrinsic value of the stock (P0)?

This is a two-stage dividend discount model. The first two dividends are discounted individually. The dividends from year 3 onwards form a growing perpetuity, which is valued at the end of year 2 and then discounted back to the present. Dividend in year 3: D3 = D2 × 1.04 = 3.00 × 1.04 = ₹3.12 Value of the stock at the end of year 2: P2 = D3/(k - g) = 3.12/(0.10 - 0.04) = 3.12/0.06 = ₹52.00 Present value of each component: D1/(1.10) = 2.00/1.10 = ₹1.8182 D2/(1.10)² = 3.00/1.21 = ₹2.4793 P2/(1.10)² = 52.00/1.21 = ₹42.9752 P0 = 1.8182 + 2.4793 + 42.9752 = ₹47.27 The perpetuity formula gives the value one year before the dividend used in the numerator. Using D3 gives the value at the end of year 2, so it has to be discounted for two years and not three. Hence the correct option is (C).