Hi,
The approach is perfectly correct. However, note that in year 3, there are no dividends (everything is reinvested in year 3); therefore, the growth from 3 to 4 is still 20%:
The approach is perfectly correct. However, note that in year 3, there are no dividends (everything is reinvested in year 3); therefore, the growth from 3 to 4 is still 20%:
\(EPS_4=1.2\times EPS_3\)
From 4 to 5, the growth follows your formula and it is 10%.
The intuition is that in year 3, we invest, and it needs a year to produce, so we will see the cash flow the following year.