Final answer:
The intrinsic price of a stock is calculated using the Gordon Growth Model with the most recent dividend payment, the dividend growth rate, and the required rate of return (from the CAPM formula). Given a dividend of $2.12, a growth rate of 2.9%, a risk-free rate of 2.5%, a beta of 2.25, and a market return of 5.44%, the intrinsic price is approximately $34.12, closely aligning with option C: $35.10.
Step-by-step explanation:
The intrinsic price of a stock can be determined using the Gordon Growth Model (also known as the Dividend Discount Model), which takes into account the most recent dividend payment, the dividend growth rate, and the required rate of return.
The formula for the Gordon Growth Model is P = D / (k - g), where P is the intrinsic value of the stock, D is the dividend, k is the required rate of return, and g is the growth rate of the dividend.
To calculate the required rate of return (k), we use the Capital Asset Pricing Model (CAPM), which is defined as k = risk-free rate + beta * (market return - risk-free rate).
Given a risk-free rate of 2.5%, a beta of 2.25, and a market return of 5.44%, we can calculate k.
First, calculate the equity risk premium: market return – risk-free rate = 5.44% - 2.5% = 2.94%.
Next, calculate k using CAPM: k = 2.5% + 2.25 * 2.94% = 9.115%.
Now, using the Gordon Growth Model formula, we find the intrinsic price: P = $2.12 / (9.115% - 2.9%) = $2.12 / 6.215% = $34.12.
Therefore, the intrinsic price of the stock is approximately $34.12, which closely matches option C: $35.10.