Explanation

Using the Gordon Growth Model:

Step 1: Calculate the Intrinsic Value

The Gordon Growth Model formula is: $V_0 = \frac{D_1}{r - g}$

Where:

• D_1 = \`1.50` $ (expected dividend)
• $r = 8.50\% = 0.085$ (required return)
• $g = 4.50\% = 0.045$ (growth rate)

V_0 = \frac{1.50}{0.085 - 0.045} = \frac{1.50}{0.04} = \`$37.50`

Step 2: Compare Intrinsic Value with Current Price

• Intrinsic Value: $37.50
• Current Market Price: $35.00

Step 3: Valuation Conclusion

Since the intrinsic value ($37.50) is higher than the current market price ($35.00), the stock is undervalued.

Investment Implication: The stock appears to be a buying opportunity as it trades below its estimated fair value.