ABC Corporation just paid a dividend of 1.50 a share. The dividend is expected to grow at 10% a year for the next 2 years, and the 5% oer year thereafter. The required return to invest is ABC stock is 12.50%.

The questions and Answers are below. I was wondering if someone could explain what formulas were used, and the intution behind it as well. Much appreciated.

1) What is the expected dividend for ABC to year 2?

Dividend in year 2 = $1.50*1.10*1.10 = 1.82.

2) What is the intrinsic value (or current price) of ABC?

Selling price at year 2 = $1.82*1.05/(0.125-0.05) = $25.41

Price = PV of cash flows = 1.65/1.125 + (1.82+25.41)/(1.125)^2 = $22.98